Top 10 Biggest Forex Trading Mistakes & Misconceptions
All Forex traders tend to commit similar mistakes when interacting with the market. They also tend to harbor similar misconceptions about trading and what successful Forex trading is all about. This week’s article can be thought of as a guide to what the biggest trading mistakes and misconceptions are and what you can do to put an end to them. You should refer back to this article often to help you stay on the path to becoming a profitable trader. This article will give you some valuable insight and direct you to other relevant articles so that you can stop making the same trading mistakes and let go of any misconceptions you hold about Forex trading.
1. Trading with indicators and fancy tools –
Many Forex traders, especially beginners, tend to erroneously believe that they need to use indicators to fully understand Forex price movement, or that indicators will help them in some way become more profitable. This leads many traders to concentrate solely on reading and trading from indicators, instead of the actual price action that these indicators are derived from. The bottom line is that indicators provide no real advantage over simply learning to read a “naked” price chart, and they actually inhibit your progress as a trader because they distract you from learning to read the pure price dynamics that occur on the charts every day. Price action tells you what is most likely to happen next in the market, you just have to know how to interpret it. After learning to trade with price action you will soon learn why trading with indicators destroys Forex trading success.
2. Not fully understanding and implementing risk / reward –
If there is one thing that all professional traders have in common it is that they fully understand the power of risk reward and how to implement it on every single trade they take. Beginning traders obviously know the importance of making sure their winners are larger than their losing trades, but they often do not understand how this translates into real world trading and what it really means. Every single trade you consider taking should be viewed in terms of risk to reward. You have to consider not only if your trading edge is present, but if the realistic potential of the risk reward on the trade makes it worth taking.
We typically want to make at least two times our risk on any one trade, doing so gives us an excellent shot at making consistent money over the long-run. Many traders get caught up on losing 2 or 3 trades in a row because they fail to understand the full implications and practical application of risk reward ratios that take time to play out. Check out the following articles to learn why risk reward in Forex is the true Holy Grail, and to learn how Forex risk reward and price action trading can make you a consistently profitable trader.
3. Not understanding position sizing –
Many traders come into the Forex market and they do not understand that just because you put a wider stop loss on a trade does not mean you have to risk more money or that just because you put a smaller stop loss on a trade does not mean you automatically risk less. A very common mistake that traders often make is that they adjust their stop loss to meet the number of lots they want to trade, instead of adjusting their position size to meet the most logical and realistic stop loss distance. A thorough understanding of position sizing is very important to your overall money management plan and to correct implementation of risk reward on every single trade.
4. Not having a Forex trading plan –
Most beginning traders make the mistake of not having a functional trading plan, and they also harbor the misconception that they don’t really need one. Forex trading needs to be treated as a business, and just like having a business plan is necessary for the growth and prosperity of any business, having a Forex trading plan is necessary for the growth and prosperity of any trader. A trading plan helps to keep you accountable in a world that allows you to do an unlimited amount of damage to yourself; the world of Forex trading. Most traders seem to get fixated on how much money they can make and thus lose focus of the real risk involved in Forex trading, a Forex trading plan that you read every single day can help to keep you focused and on track, so that you don’t fall off the wagon and begin trading in a delusional manner.
5. Gambling instead of trading –
A question that every trader who has been trading for any period of time needs to stop and ask their self is; “Am I gambling or am I trading responsibly?”. Almost every trader falls into some sort of cycle where they are simply gambling instead of trading at some point in their trading career. The quicker you can recognize this and pull yourself out of this deadly cycle the quicker you will become consistent and profitable. Trading should really be viewed as “risk managing”, and not necessarily as “trading”, the traders who manage their risk the best are the ones who make the most money; take care of your risk and the market will take care of the rest; that is a very general anecdote, but it is also true, you have to control your risk very consistently if you don’t want to end up gambling in the market, when you put your focus on risk control instead of on how much money you can make the money will seem to come naturally. So, are you a Forex trader or a gambler?
6. Allowing emotions to cloud judgment / giving into emotions –
There are many factors that can contribute to and induce emotional trading, and emotional trading is the reason why so many traders lose money in the markets. Emotional trading is the end of result of not doing other things right, like anything or everything else listed in this article. Any one of the trading mistakes listed in this article can induce emotional trading, and once you begin trading emotionally it is extremely difficult to pull yourself out of its grips because it is a psychologically reinforcing problem that traders simply cannot shake unless they totally stop trading for a period of time and take a step back to think logically about what they are doing.
The Forex market can be an excellent arena for self-improvement and mastery of one’s own impulses and mind, or it can be an arena for total financial destruction and loss, which arena you ultimately create depends on whether or not you can master your primitive emotional brain structures with your more advanced logically thinking and planning brain structures. Read about how price action will help cure emotional trading problems.
7. Not having patience –
Patience is scare among amateur Forex traders. The reason it is scarce is because most new traders approach the market from the complete wrong perspective. Most people are attracted to trading because they think it will “fix” their life in some way, whether through freeing them from a job they hate or by providing them with extra money. While these are by no means bad or inappropriate goals to have, when you approach your trading from a feeling of “needing” it to work because you have no other options, you are almost certainly doomed to fail as a trader.
You have to be completely fine with whatever happens to your trades, and this means not trading with money you can’t afford to lose. Once you start approaching the market from a perspective of not feeling like it “has to” work out for you to be happy in life, you will begin to exercise more patience in the Forex market and this will drastically improve your overall winning percentage and will actually make you more profitable faster.
8. Not trading higher time frames –
I have been trading for nearly 10 years now and I still almost solely look at the daily and 4 hour charts. It amazes me to no end how many beginning traders that I encounter who want to trade shorter time frames. I get emails almost every day from traders asking me questions about trading the 15 minute charts, or even lower time frames. The simple fact of higher time frames that makes me concentrate most of my trading efforts on them instead of their lower time frame counterparts is that they act as natural filters of price movement, filtering out the price action that is not useful and leaving with you with a much clearer picture of what price is likely to do. This is why when you trade higher time frames in Forex combined with price action you have an extremely potent trading strategy at your finger tips.
9. Over-trading / being too involved
The quickest way to becoming a full-fledged emotional trader right behind over-leveraging, is over-trading. I find that traders are often guilty of over-trading and don’t even realize it. Most traders that I encounter do not spend long enough demo trading; this means they jump into live-market trading too soon and as a result of this they begin over-trading because they have not spent enough time on the demo charts perfecting their Forex trading strategy. Over-trading is most tempting after a trade, whether it is a loser OR a winner. Traders need to be especially aware of their state of mind immediately after exiting a trade, because this is when emotions like revenge and euphoria hit their peak, making it very likely the trader will dive back in the market with no real sound reasoning behind their action. Forex trading can be addictive and you certainly should trade less to profit more.
10. Not taking profits –
Yet another area where Forex trading is a paradox is profit taking. While hope is a great feeling to have in almost every other endeavor in life, in the financial markets hope is often the downfall of traders. They hope for larger profits, or they hope the next trade will allow them to make back all the money they lost. Most retail traders simply do not fully realize or understand the implications of the fact that the Forex market ebbs and flows, it never moves in a straight line for every long. So, when trying to build up a relatively small trading account it is essential to your equity curve and to your emotional sanity that you take profits as they come, instead of constantly hoping and holding out futilely for ever larger profits.
This is why I teach that traders should often take profits of 2 or 3 times risk, because generally speaking if you hope for more than this once you are up 2 to 3 times risk, the market is going to reverse and move back towards your entry. These reversals are what shake out most amateur traders, so it is crucial that you take profits when you have them, otherwise they are likely to disappear very quickly. As the Kenny Rogers song goes: “You’ve got to know when to hold em and know when to fold em”.
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37 Comments Leave a Comment
Article is very useful. Mistakes are the reason of lack of knowledge. Thanks!
I loved the article I have just started to be interested in Forex trading and this is giving me the pointers I needed.I am determined to see this through again I think with patience and determination anything can be done. thanks!
TX man i love all part of this articular and like to have it as a printed or pdf book on my library,
this is my favorite LTTTM article
very incisive points
Thanks for sharing all of your experience and let us “ordinary FX-traders” have a chance in this market.
Yes, I have experienced alot of those errors. Much better now.Accurate article. I would add for number 11 mistake is not being objective about your trading plan. If it is not working, find out why. Don’t keep doing the trading plan because it should be working.
great article Nial, thank you so much for sharing you knowledge. God bless.
Nial, thanks for continuing to share your thoughts and experiences to help make the novice traders better. Very useful information as always.
Thanks Nial, I has been suffering for not taking profit on the right time, your article is helping me to improve and avoid this mistake and also to avoid the other mistakes I can do. Thank you very much!!
Nial, I have been trading for the last 6 months, and yes I have made nearly all 10 mistakes. I now focus on removing these from my trading thanks to your guidance. Keep up your great work. Cheers David
Great posting! Can’t wait to attend your course for sure!! & enjoy all the quality materials in this website.
Thanks Mr. Nail,
Because of the consistence light you have made me seen in the forex market, I will give you a title in my language Oluforex meaning the god of forex.
Another excellent article
Nial ur artical is perfect for holding a nice and great plan before going to swim in DeepBlackSea, And u also provide lifejaket with pinpointing that how to avoid to play with nudenaustyshark. Many thanx. azhar
This is the best e-mail i have ever received from you.
I’ll have a look on it every now an then until you send
me a better one.Thanks
Very informative stuff.I am new to trading and just on a demo acc at the moment.I have implemented your stratagies on my recent trades and I am glad to say they are working.
Nail, It is awesome. Your articles are like a mirror to all traders to see and correct where they stand. Keep going god bless you with more wisdom to enrich many lives around the globe.
Nice one Nial, Very well put, I must say! anybody still in any dought about anything in the forex market should read those ten points ten times over and get them in to the head…
that’s about as clear and as quick as i have seen anybody put it. ‘Can’t be clearer than that’.
Thanks, best regards…
Thank you very much for a great and informative article.
Best wishes David
Thank You NIAL!
This is such a SOLID Teaching.
I will endeavor to practice it.
So Listen-Up folks Get To It.
Great Article – Thanks Nial
Sooo many trading truths in one quality article. Pity so many traders get mislead early on in their trading careers and get wiped out as a result of not quite correct trading information. Have come across your site quite recently after
sim trading sooo many indicators over several years, looking for something that takes the guess work out of trading. They dont as there isn’t such a beast.
Your price action method simplifies everything right down to make trading simple compared to working with indicators.
Number 8 is so true, trading daily charts are so much simpler.
Nial I cant wait to get your full trading course, you are the best and the easiest to understand.
nial, your whole article is great…i especially like number 9 specifically where you address the fact that right after exiting a trade, emotions like revenge or euphoria hit their peak and this may induce a desire to dive into a position again without a viable reason…thanks again, richy
Nial thanks so much for your support & for all your quality contents in your training plus the postings.
Prof. nail,your write up is an x-ray to the traders asenal.God will continue to increase your knowledge and wisdom.Thank u.
Another great article Nial! These 10 topics could not be more spot on. Keep the info coming!
Thanks very much for today post.i wll make sure i pratice it and get back to you.
Hi Mr. Fuller
Good news Nial, I have only eight out of the ten biggest forex trading mistakes. Ok truthfully nine out of ten; I don’t use indicators. I am getting close to understanding your points on a practical level, implementing them I sense is right around the corner. Like “price” I don’t know how big that corner is. I will keep at it and continue to recognize my mistakes.
niall, spot on. Reading that I can see past mistakes that I have made, in trading and in business. The old saying is true “plan to fail or fail to plan”
THIS IS ANOTHER MASTER PIECE FROM THE MASTER! NIAL THIS IS EXCELLENT,I THANK YOU FOR THE WONDERFUL JOB YOU ARE DOING,I HAVE BENEFITED GREATLY FROM YOUR WORKS THANKS FOR GIVING ME GOOD ANSWERS TO ALL THE QUESTIONS I PUT ACROSS.YOU ARE A GENIUS AM INTRODUCING MANY TRADERS TO YOUR GREAT SITE.KEEP IT UP BROTHER!
I need to learn to be patience, it is my downfall, how can I learn to be patient Nial? Is it something that can be done or am I doomed to always fail because I feel like I need to always be in a trade. I love your articles. I think I will get your course.
Thanks a such great stuff, keep it up.
Bowser .. I agree.. Nial’s teaching are brilliant, the best I have seen around. We all need to thank him for his generous postings and quality content in his training course and commentary, this site rocks.
Your forex course is great Nial, I joined last week and am enjoying the services alot. I wanted to just say thanks, your a great mentor and we are lucky to have you that’s for sure.
An excellent synopsis of your most important lessons and principles on forex trading Nial.. there are some real gems in there, well done, thanks again.