Common Trading Mistakes
Overuse of leverage
Not controlling speed of market due to over use of leveraging tool. The lower the leverage factor (or Gear ratio), the slower the move.
Gear ratio is a good way to understand leverage. If you have a car in 10th gear it will go much faster than if its in first gear. The higher the leverage or gear, the faster the speed and the less time to react. It is the same thing with Forex: the more lots, the faster the speed; each lot increases leverage or gear ratio.
Caution: Leverage used correctly is your greatest tool, used incorrectly it becomes a weapon of destruction and WILL blow you up.
LEVERAGE – Understand the difference between Retail Leverage and TRUE Leverage. Retail leverage is what you are sold, if a broker tells you that they offer 50:1 leverage. What they are referring to is the Mini platform that uses $200 per lot to trade $10,000. Thus 50 x $200 = $10,000. First and foremost, NOBODY in the world can trade with such high leverage in reality. For our trading example we use 4:1 leverage, this means that we trade 4 mini lots against a $10,000 account. So the TRUE leverage is 4 lots x $10,000 = $40,000 or only 4 times our equity. Using the demo $50,000 platform means your only trading $200k or 2 lots against your equity balance. This is 4:1 leverage because your only trading 4 times the value of your account. $50,000 (demo) x 4 = $200,000. This is known as true leverage. Your equity curves, draw downs etc will be reflected by an account value of $200,000 not $50,000. Or $40,000 not $10,000
Lack of trading plan
Some traders do not know what to do if they are wrong nor what to do if they are right. The large floating profit they make may often turn into a large loss, because they did not know when to get out. Trade defensively and always know your downside and what you are at risk of losing.
Lack of money management
Risk/Reward; Trading is a question of what the odds are of being right vs wrong. This is known as risk/reward ratio. Good money management means you know your profit objective and the odds of being right or wrong and know how to control your risks with stops.
Failure to use a stop
Rejection of ego is perhaps the toughest part of trading to handle. Not only does the market tell you you’re wrong, which no one wants to be told, but it also takes your money. Stops are a good thing; because of this ever-trending market, it cuts your losses and gets you out before you allow your account to be ruined. The stronger your entry, the less likely of being stopped out. Identifying strong entries will keep you in the position longer, and when stopped out, be happy you’re out because you were wrong. Never change your plan; once you move your stop, you had no plan and are at the mercy of market which most times you lose more.
Accept a losing trade
Many traders lose confidence after a couple of losing trades and reduce their ability to become an efficient trader. This market requires a gradual learning curve so only persistence, trial and mistakes will help enhance your ability to trade. As a trader your emotional cycles will be like none other. If you cannot accept a losing trade and realize it will happen more often than not while learning, then don’t waste your time starting. Rome wasn’t built in a day and traders aren’t made in a day.
Lack of proper discipline is hope. Hope is the most devastating of all feelings in trading, because it can lull you into becoming complacent. You know in most cases when you find yourself hoping, you are wrong, and just get out of market. This requires the most self-discipline of all. You were wrong. Never hope; just manage doubt.
Taking quick profits and letting losses run
Very common among traders, this is normally a result of no trading plan. After one or two losing trades, you are likely to take a small profit, even though that trade could have been a huge profit maker. This mistake is overcome by using a predetermined stop to prevent losses from running. Entry in a stalled or slow market allows you to get away with tighter stops, reducing your losses.
Overstaying your position
This is simply failing to take profits at a predetermined level. If the market meets your price target, adjust your stop above entry, to be in a risk less position and not be at risk of losing profit.
Averaging a loss
Justifying averaging down by figuring you will have a lower entry price and requiring a smaller move to break even may work but normally it tends to go against you because of failure to recognize trend.
Increasing your commitment, with success, usually leads to disaster. When you are right more often it leads to larger trade sizes, which end up ruining your account. This ruins more traders than a series of small losses. Never try to make back all losses on one trade! Stay Disiplined!!!
Over trading your account
When you are certain that the next move will be a really big one, you sometimes risk too much. To prevent this you must have a hard and fast rule that you will not risk a certain percentage of equity regardless of how strong the trade looks. Only trade overweighed with a profitable account and risk their money it will provide the largest gain!
Changing your plan during trade
When you are most exposed to emotion and greed, you are much more likely to change your plan. If you lift your stop or change your target, you have no plan.
Trading for excitement, not profit (lack of patience)
Some traders do not trade for money; they just like the action. Think about it: Must you have a trade a day or just an opportunity to make money, regardless of the time frame? The market will dictate NOT you.
Chasing the Market
When you are looking for entry and convinced the market is higher even though technicals disagree you jump into market while rising only to have it fall after it settles down. Be patience and don’t get emotional before entry or while market is in motion. There is always another opportunity to make money.
Fighting the Market
When you know your right and the market keeps taking your money or hitting your stops. You can tell your fighting the market because your insides will be highly stressed and your frustrations will be tested. Accept the fact you are on the wrong side before you ruin your account and leave the market alone for a day until you have a chance to relook your position or ask a professional at OTA.
The market will do the unexpected and at times you will lose; but if you steadfastly stick to this plan, you can make money. Don’t expect to run a marathon, day one. Follow this rule of thumb: If you lose three trades in a row, get up and get away take a break!