Fail to prepare themselves emotionally and financially
Most beginners have wrong ideas about trading. There are usually two scenarios. Traders that overestimate how much money they can earn often put every egg in a single basket and get crushed when drawdowns start. It’s important to realize that trading is not a job that will give you steady pay cheques.
Trading is very similar to running a business. In trading like in business, there are good, profitable months and bad months. Every trading strategy experiences drawdowns, it’s crucial for traders to have saved enough money to get through the drawdown periods. When a trader’s income is fully dependent on profits from trading, he or she is more likely to overtrade.
It is equally critical for traders to prepare emotionally. Greed, fear, hope, and laziness can get in the way of profitability. Bulls and bears make money and pigs get slaughtered in the market. Greed leads to overtrading. Fear prevents traders from opening orders even when great opportunities are presented.
Hope means that strategy is not tested. And when it comes to laziness, everything is obvious. Trading is not for lazy people. We all think from the very beginning of the trading journey that it’s an easy way to make money. In reality, most people lose money, and the ones that profit from the markets consistently are the most hard-working individuals.
Not learning the importance of risk management
Proper risk management is the key to success in trading. The basics of risk management are very simple to understand, however, very hard to implement, as human emotions often get in the way. Beginner traders typically take oversized trades and end up losing their entire accounts.
Proper risk management has two components. The first one is related to trade size. The second one is related to the likelihood of price going to the predicted direction. Professional traders typically never risk more than 1-5% of their balance per trade. The higher the likelihood of success, the higher the appetite for risks.
It’s critical for beginners to understand the power and dangers of using high leverage. Leverage helps increase purchasing power. For instance, if a broker offers up to 500:1 leverage on currency pairs, it means that traders can increase their purchasing power 500 times and make oversized orders. Larger order size can bring large profits, on the downside drawdowns can also be massive. When using high leverage, success becomes dependent on pure luck. Luck may work a couple of times, but it will eventually run out.
Fail to learn about the assets they’re about to trade
Novice traders should always learn about what impacts the price of assets they are planning to trade. Every asset class and every instrument in each asset class has different triggers that can cause price hikes or drastic declines. It’s critical for traders to use various tools and platforms to enhance their knowledge. The beginners' guide to currency trading can help traders understand basics in trading and help prepare them better.
Currencies and Stocks are very different in terms of how their prices move. Base currency is always valued in relation to its quoted currency. And since currencies are backed by countries and real economies, Forex pairs have cyclical valuation. Stocks, on the other hand, can go on a rollercoaster. Their price can drop to zero when the company gets bankrupt or grow endlessly by the help of inflation and expanding business. In addition, there are currency pairs that are largely influenced by the price of commodities. One example of such currency is the Canadian Dollar. Since Canada is one of the top producers of oil, oil price is highly correlated with the Canadian currency.
Trading without a journal
One more mistake traders make is that they fail to learn from their own mistakes. Trading journals are priceless when it comes to developing beginners into professional traders. Every trading journal should include technical details on every conducted trade, such as: market conditions, open price, close price, reasons for entry, reasons for entry, sketch or screenshot of a trade, etc. In addition, it is important that traders include their physical and emotional state before and after executing trades. For instance, if trading when tired makes traders lose money, the journal will reveal that easily.
Trading journals can increase accountability. Traders that plan their trades well and save information after a trading session in a journal are more likely to pay more attention to their trades. Journals make traders more selective in their decisions.
Trading without a tested strategy
Trading strategy should include various aspect of a trader's life. For instance, strategy should answer questions on how much time will be for trading, and how much for rest and personal life. Strategy must include rules for risk management, rules for finding the right trading setup, rules for developing existing strategies and more. It is crucial for traders to test their strategies first before going live. There are 3 ways that traders can do that:
- Test strategies on demo account (trade using fake money on live charts)
- Backtest strategies (backtesting saves a lot of time as strategy is compared to historic price fluctuations.)
- Live test strategies using micro accounts. Micro accounts enable traders to live test their robots and manual trading strategies by risking a small amount of their capital. Live testing is superior to demo testing as spreads and conditions are live.
To sum everything up, beginners can minimize their losses and maximize profits by simply learning from other traders’ mistakes. It’s crucial for beginners to have realistic expectations and prepare themselves emotionally and financially. Trading without proper risk management is a terrible idea. Luck always runs out, and oversized positions can blow up accounts. Traders should learn about assets they plan on trading, as every asset price has different influencers. It’s crucial for traders to use a journal to learn from their own mistakes and develop their trading strategies. And lastly, every trader should use a strategy to make decision-making, planning and trade execution easier.