Forex trading can be treated differently. For some people it is a way to earn extra income, others consider it a hobby and some make a whole business out of it. But no doubt that recently Forex popularity has significantly increased in different parts of the world. Forex trading in India is not different. The reason is simple, with easy internet access, you have unlimited educational resources on how to trade Forex and different brokers give possibilities to enter financial markets with low threshold right from your home. But don’t confuse easy access with simplicity of trading. Trading any financial assets is far from being easy and simple. As in any other field you need to study first and your path to success will be covered with failures and mistakes.
So, here are 3 top mistakes that beginners usually make when they start trading:
Mistake #1: Trading without Proper Education
Some ads offer easy income while trading Forex. In reality, it doesn’t take too long to start trading. What you need is to open an account, download an app or a trading platform, fund your account and you are ready to open your first trade. Nothing fancy, easy enough! The most interesting part comes next: what assets to trade, buy or sell it, how much, position size, where to exit the trade, etc. Here comes the education. There are plenty of resources online, you don’t have to pay money to learn how to trade. Use free tutorials, books and articles. Just take your time, study the basics, practice on a demo account, and only then try to trade live.
Avoid these at any cost:
- Making random, emotionally driven decisions.
- Misunderstanding essential trading concepts like leverage, margin, and market analysis.
- Not taking time to study the markets.
Mistake #2: Ignoring Risk Management
It’s a very common mistake because the main reason why people want to trade is to make money. It doesn’t matter what they say, in the corner of their minds profit is always the goal. So, when brokers warn that you should use for trading only capital that you can afford to lose, this information in most cases is just ignored.
What is risk management? You can find different definitions online, but basically it comes down to the following points:
- The size of one position should not be more than 5 – 7% of your whole deposit. E.g., if you funded your account with $1000 and want to go short (to sell) on the EUR/USD pair (you think that EUR will fall and USD will rise) what should be your position size? Correct: no more than $50 – $70 in one deal.
- Risk/reward ratio should be at least 1:1. When you open a trade you already should have in mind where you will close it. There are two basic scenarios, the price goes in your favor and you close the deal with profit or the price goes against you and you close the deal with loss. These levels where you close the deal are called entry and exit point. If you think the price will go 100 pips (the smallest unit of price change) in your favor, your stop-loss should not be more than 100 pips. The ideal risk/reward ratio is 1:2 – 100 pips stop-loss and 200 pips profit. In this case you’ll need 1 profitable deal out of 3 to be breakeven.
- Always set a stop-loss. Sometimes unexpected news may come out and the price will rapidly fall or rise. If you didn’t set up a stop-loss order and the trade goes against you, you could quickly lose your entire deposit.
Mistake #3: Overtrading
Beginner traders think: the more we trade, the more we profit. False! Frequency is not equal to probability. More trades only lead to lack of concentration and proper analysis and this results in more losses. A desire to overcome losses brings more trades and it becomes a vicious circle. Impatience and excitement are roads to disaster. You should always have a clear trading plan with an explanation of the reasons behind each trade.
Of course, it is just a tiny portion of what a newbie trader should learn. But as the famous saying goes, where there’s a will, there’s a way.
