We have all heard about how people have become rich through trading, particularly Forex trading. Most rookie traders are driven by the desire to make a lot of money, but they end up making numerous mistakes that can clean out their accounts within a short period.
Here are ten bad mistakes that most novice traders make;
1-Not Making Use Of Stop-Loss Order
This is a common mistake among rookie traders. A stop-loss order is meant to prevent a trader from making significant losses. Inexperienced traders tend to be over-optimistic when trading so they overlook the importance of using a stop-loss order. Sometimes they might deactivate a stop order because of a belief that the trend will change direction at some point and the trade will go in their favor, which is usually a catastrophic move.
2-Too Much Leverage
Leverage works two ways; it can either multiply your returns quickly or intensify losses when you have a losing trade. Novice traders may be excited when they realize that they have the power to maximize their profits by just manipulating the leverage especially when they are doing Forex trading. Leverage is particularly bad if you have a small capital because a small move in the wrong direction will wipe out your capital within seconds.
3-Failure To Have A Plan Or Failing To Adhere To One
Veteran traders usually begin a trade with a clear plan. These traders know where they are going to enter and exit and what their stop loss will be. New traders are less likely to have a plan, and if they do, they might not follow it through to the end. When they place a trade, and it doesn’t go their way, they might close it and trade in the direction that the trend is going, which is also known as chasing the money. This method of trading can have disastrous results because you might end up making substantial losses either way.
4-Trading Too Often
Beginner traders may be tempted to overtrade which can diminish all their profits and turn their good luck into big losses. Veteran traders have learned over time that trading every so often can have tragic effects on their overall performance and returns but novice traders may not know this important lesson.
5–Failure To Specialise
Amateur traders trade numerous markets such as options, stocks, Forex among others. This is a costly mistake because it means that such a trader does will not gain the experience they need to become experts in one market. Most experienced traders know the importance of specializing in one market and learning as much as they can about it.
One crucial advantage is that it will help them mitigate losses since they will master the market trends and know the best times to trade in a year and the factors that affect prices among other things.
6-Failure To Do Homework
New traders usually rush to start a trade without doing any homework or enough research. Homework is important because it will equip new traders with knowledge about the timing of trade-influencing data news, seasonal trends and trading strategies that seasoned traders have. New traders prioritize initiating a trade urgently over conducting intensive research, which usually ends up badly for them.
7-Increasing Capital To A Losing Trade
Some traders average down which means they make extra trades adding to their position when the trade does not go their way. The danger of doing this is that the price can go against you for a longer period than you anticipate. The best thing to do in such a situation would be to exit the trade instead of pumping more money into it. Adding to a trade that is losing magnifies the loss the more the price goes differently than the one you anticipated.
8-Risking All Your Capital
New traders are usually tempted to risk a huge percentage of their capital or go ‘all in’ so to speak. Ideally, you should only risk 1% of your capital or less in every trade and never exceed the 3% mark. Some of the reasons a trader may want to do this are to do revenge trading. This is trying to recover the money you have lost especially after successive losing trades, and being overconfident that you have made the right prediction and therefore you won’t lose on this specific trade. Also, you may have been lucky lately and made returns in most of the trades that you have made so you may think that taking a bigger position will be the best thing to do to make more returns when things go your way as they have been doing recently.
9-Failing To Research Or Test Your Broker
The act of depositing money with a broker is a big gamble in and of itself. In essence what you are doing is entrusting your trader with your hard earned money. If the Forex trader is a scam or is mismanaged or is bankrupt, you may end up losing all your money. To avoid this, you should research extensively and find a good broker who will not fleece your money.
10-Taking Profits Too Early
This is a big problem among novice traders because they fear the trade may turn around and go the other way before they have taken their profits. You may be good at predicting trends and have the best strategies, but they will not be helpful to you if you are too quick to take profits. To circumvent this problem, you should place your stop loss order and your take profit order and move far from the device you are using when trading.