When it comes to Forex trading, there are literally a thousand different ways to make money. Everything from algorithmic trading to using simple price action and everything in between.
This is why I often say that trading price action isn’t for everyone. Some folks have a passion for fundamentals or coding and therefore need to follow that passion in order to achieve consistent profits.
But among the myriad of ways to make money in the Forex market, there are certain truths that remain constant regardless of the path you choose.
Below you will find five of the most costly mistakes you can make as a Forex trader. All of the mistakes below were taken from my own journey to find consistent profits. Each mistake is accompanied by an explanation as to why it’s so costly as well as actionable advice on how to overcome it.
With that, let’s get started.
Overtrading is perhaps the worst offender of all the mistakes you can make as a trader. It’s also something that I’ve discussed at length on this site and will continue to mention as I feel it’s that important to your trading success.
So what is overtrading and how can you know if it’s having a negative impact on your trading?
To the first question, overtrading simply means that you are taking more trades than the market has to offer. The Forex market will only produce so many quality setups in a given month. This is especially true if you are trading the higher time frames.
The relationship between more trades and more profit is inversely correlated. This inverse relationship between more trades and more profit is best explained by the law of diminishing returns, where the results of anything eventually suffer if only one factor is increased while all other factors remain constant.
When it comes to overtrading, your trading frequency is the one factor that is increased while the market is the factor that remains constant. As your trading frequency increases, you eventually outpace the market’s output which leads to taking subpar setups and eventually realizing more losses than profits.
So how can you know if you’re falling victim to overtrading and better yet, how can you fix it?
In the spirit of simplicity, if your hit rate is lower than 50%, you are likely overtrading. Of course you can still be profitable at a hit rate less than 50% using a favorable risk to reward ratio. But if you have a true edge in the market and you’re not overtrading, your hit rate should be 50% or higher.
To learn a simple way to begin taking fewer trades, see the article How Many Trades Should You Really be Taking Each Month?.
Have you ever heard the saying, give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime? Blindly following someone else’s trade ideas is the same as taking food for a day. You may make a few pips here and there, but in the long run it accomplishes nothing.
The biggest offenders here are of course Forex signal services. While I do believe there may be a few good ones that provide some education along the way, most of them will only complicate your learning curve.
Trading because someone tells you to doesn’t allow you to take accountability for the outcome nor does it actually teach you how to trade.
Let me be clear, there is nothing wrong with getting trade ideas from a more experienced trader or verifying your own ideas with someone else more experienced than you. There is, however, something wrong with blindly following someone else’s trade ideas. In other words having no idea why you are taking the trade other than the fact that someone told you to.
Allow me to elaborate on the two issues I mentioned earlier.
1) No accountability
If a teacher had told you when you were a child that the world is flat, would you have held yourself accountable when you later learned the truth?
Probably not. Naturally you would point a finger at the teacher for giving bad information. After all, it was the teacher who led you down the wrong path.
The same holds true when blindly following another trader’s ideas. If a trade goes wrong, which is bound to happen, it will be extremely difficult for you to take accountability for the loss. This is because it’s easier to blame the trader who gave the “bad” information than it is to take accountability for your actions.
Like anything in life, if you want to be successful you have to put yourself in a position to take accountability for your actions. Becoming a consistently profitable Forex trader is no exception.
2) Nothing learned, nothing gained
Blindly following someone else’s trade ideas doesn’t teach you anything. Some may argue this point, noting that it teaches them how the more experienced trader views certain market conditions.
But again, the problem arises when you copy someone else’s trade idea and have no understanding of why you are taking that trade. In order to learn how to trade properly you have to fully understand why someone is taking a trade, not just copy their idea.
As for signal services, let’s just assume that you find one that provides profitable signals. You follow them for a year and make a decent return; things look good. Out of nowhere their website goes down and you never see or hear of them again.
You just lost a year’s worth of learning because you were too focused on trying to make pips rather than focusing on becoming a successful trader. Those are two very different things, by the way.
If you truly want to become consistently profitable, you have to embrace the process of getting there, not just the end result. If you do this and never ever give up, the profits will come. But there is no fast-track to becoming a great trader.
This is perhaps the most overlooked mistake of them all. Failing to identify key levels and detail your exit plan before putting on a trade means that you are likely making an emotional decision rather than a logical one. Otherwise you would have been strategic in your approach by defining all possible outcomes.
You wouldn’t go on a two week vacation without planning it first, right? Of course some will plan more than others, but everyone does at least some planning – book a hotel, buy plane tickets, look into venues of interest, etc.
Putting on a trade without first having an exit plan is like not packing for a trip, getting in your car which has no gas and going to the airport hoping to catch a flight to a place you haven’t decided on yet.
To those who love spontaneity, that may sound like a dream vacation. But to the majority of us (myself included) that sounds like one heck of a stressful trip.
The same levels of stress are experienced when you put on a trade without a plan. You effectively put yourself in a reactive state of mind rather than a proactive one – which is only possible when you plan your trade and trade your plan.
Want to make consistent profits from the Forex market? Then my advice is to start cutting your risk in half. Seriously, whatever you’re risking right now, cut that amount in half and I guarantee that you will begin to see more clearly what the market is doing rather than seeing what you want to see.
How can something so simple as cutting your risk in half open up your eyes?
Because the emotional ties to money are blinding you, making it impossible to see the price action on your chart in an objective manner.
Money is funny that way. Everyone wants more of it, but most can’t handle what they already have effectively enough to prove that they deserve more of it. Read that a couple times if you have to, because it’s extremely important to understand if you want to grow a trading account.
How many times have you grown your account only to watch it dwindle over time? Want to know why that happens?
It happens because you aren’t deserving of it. Don’t take that the wrong way. This has nothing to do with your level of effort or passion for trading. Combine those two things and you probably are deserving of a larger trading account.
By saying you aren’t deserving of it, I’m referring to reprogramming your mind and rethinking your approach to money management as your trading account grows. Going from a $1,000 trading account to a $3,000 account is great but it can also wreak havoc on you emotionally if you don’t stop to reassess the progress you’ve made.
For example, if you were risking a flat 3% with $1,000 or $30, are you ready to start risking $90 per trade? That’s a big change and one that many traders don’t take the time to appreciate as they attempt to grow their account.
Of course your account won’t jump from $1,000 to $3,000 overnight. But I see too many traders trying to use a static approach to money management rather than using a dynamic one, which is needed as your account grows.
This is another reason I’m not a fan of risking a flat percentage. A far more comprehensive and dynamic way to manage risk is to use a percentage combined with a dollar amount.
Above all else, just remember to keep your risk small. This can be hard especially if you are starting with a smaller account, but even the Great Wall of China was built one brick at a time.
This last mistake ties back to number one, overtrading. However this one is a bit different in that it involves a lack of patience when waiting for a trade setup to confirm rather than taking too many trades.
We live in a world of instant gratification where everyone wants to be rich yesterday. This leaves many traders feeling anxious about their “slow” progress. This anxiety leads to three common mistakes that are equally disastrous for your trading account.
We’ve already discussed the first two, so now let’s take a look at why it’s important to wait for the market to confirm a setup before putting capital at risk. To illustrate the importance, ask yourself this simple question:
Why am I trading the higher time frames?
One reason that should immediate come to mind is that the higher time frames act as a natural filter to news events. But there’s more to it than that.
You trade the higher time frames because they help to confirm key levels in the market, among other things. If you have ever watched the last hour of price action on an active trading day you know what I’m referring to. During the last hour you will see buyers and sellers jockey for position before the New York close at 5pm EST.
That’s your chance to get a sneak peek as to where other market participants are positioning themselves. And those massive moves right before the close are not the result of retail traders buying and selling. Those moves are the “big boys” repositioning themselves before the close.
This can be hugely advantageous, so long as you don’t jump the gun and enter the market before the setup is confirmed. If you are trading the daily time frame, be sure to wait for the day to close and the setup to confirm before putting any capital at risk. Anything less is just gambling.
Forex trading can be an extremely rewarding endeavor, both mentally and financially. However it isn’t without hurdles and setbacks. You will be challenged every step of the way regardless of how you choose to trade or which time frames you decide to use.
Like any endeavor, there are best practices that can be implemented to make it more enjoyable and in our case, more profitable. The five topics listed above are some of the things that I have learned since I began my Forex journey in 2007.
I truly hope that by sharing my mistakes you will be more aware of these pitfalls and thus less likely to follow suit.
Are you guilty of any of the mistakes we just discussed? If so, how do you plan on overcoming them?
Share your experience or ask a question below. I look forward to seeing yours.