First Time Trader? Watch Out For These 8 Beginner Mistakes

A computer, an Internet connection, and a few hundred dollars. Believe it or not, that’s all you need to start trading Forex. With barriers to entry so low, it doesn’t come as a surprise that so many people, especially Millennials, have taken to Forex trading as a way of growing their wealth. However, low barriers to entry are in no way a guarantee of quick profits, and trading, in general, shouldn’t be confused with “get rich quick” schemes. It takes many years to master it, and a lack of experience can make your profits plummet. Forex trading in itself will always carry a certain level of risk but, before you worry about the fluctuations of the market or the role of socio-political events, you need to make sure you’re not making any of these beginner mistakes: 

1.   Trading too early

Nowadays, there’s a lot of pressure on young people to start investing as early as possible. While it might be true that the Internet has made it possible for everyone to gain access to market insights and the world’s youngest Forex traders are teenagers, starting your trading journey too early isn’t usually advised. Generally, experts advise trading money you can afford to lose, not the money for bills, instalments, and groceries. So, before you start trading, make sure you have a stable source of income and an emergency fund.

2.   Trading without a plan

Forex trading is not one of those activities where you make it up as you go. Without a plan, trading is reduced to gambling, and the success of your actions will depend entirely on luck. So, before you begin, take the time to create a trading plan that includes the following:

●      Your goals and expectations from trading

●      How much time you can spend trading

●      Your risk-reward ratio

●      Your capital for trading and

●      Your knowledge of the market

This plan will help you outline your trading strategy and develop a methodical approach.

3.   Signing up for a broker that doesn’t match your trading style

Successful traders spend days comparing forex platforms and don’t sign up to whichever broker is trending that week. There are many options you can choose from, but the fact that one of your friends liked a broker doesn’t mean the same choice will be good for you too. So, before you start trading, do your research and find out everything you can about the broker’s fees, withdrawal times, trading platform, and customer support. If you’re from the US, you may also need to learn about brokers located outside of the US, because there are only few operating in North America.

4.   Not taking advantage of every tool you can find

In the past, traders were people in their 50s or 60s who had a background in finance or worked in financial institutions. Now, that’s no longer the case because everyone has access to their professional tools. So, why not use them? As a beginner, you can make up for lack of experience by using specialized tools to analyze the market and set the parameters for selecting trades: calculators, currency converters, correlation matrices, charting software, economic calendars, not to mention copy trading services - these are just some of the tools that can boost your profit margin.

5.   Trading without a stop-loss

The fact that you had one unsuccessful trade doesn’t mean you should stop trading or change your strategy. However, beginners often go the opposite direction, recording loss after loss and still refusing to stop, hoping the tide will turn. This is why a stop-loss order exists. Stop-loss orders cost nothing to implement, and they’re in many ways similar to insurance. Basically, when an asset’s price drops below a certain amount, it’s sold. This reduces losses and takes the emotion out of the equation. Also, if you don’t have time to monitor your trades, the stop-loss order can help you mitigate losses when you’re busy doing something else.

6.   Following too many technical indicators

In Forex trading, technical analysis is a way to determine the current trading position by looking at historical data and studying price charts and price patterns. Professional traders use it to make calculated decisions, and there are many tools that can help you with technical analysis. However, as a beginner, following too many technical indicators can have the opposite effect because they can become confusing, distracting, and can make you lose focus of what’s happening in the market. Instead, you should try and combine technical analysis with fundamental analysis, which follows economic, social, and political factors.

7.   Not knowing your risk-reward ratio

There will always be losses in Forex trading, and sometimes, when you take high risks, you gain the biggest rewards but the question is: how many of these risks are you realistically able to take? Before you start trading, make sure you understand your risk-reward ratio, because there are strategies for all styles. As a beginner, taking on too high a risk not only makes you lose money but also forces you to make decisions based on emotions.

8.   Not investing in your financial education

No, we’re not saying you should go to college or undertake any formal trading. Anyone can be a trader but, if you want to maximize your opportunities and grow your wealth, you need to invest a bit in your financial education too because that’s the best way to make informed decisions and eliminate the uncertainty beginners often feel. Most brokers already have online resources for beginners, so that’s a great starting point for understanding basic forex terms. You can then move on to advanced trading, read a few books written by veteran investors, and tune in to finance podcasts.