Advanced Forex Blog

The Most Common Forex Trading Mistakes and How to Fix Them

November 14, 2021 | 4:40 pm | Advanced Forex Blog
November 14, 2021 | 4:40 pm
Advanced Forex Blog
The Most Common Forex Trading Mistakes and How to Fix Them

Forex Trading Mistakes

In this article, we will tackle and discuss in depth a recurrent topic that a lot of forex traders, if not all of them, suffer from. The most common trading mistakes, and more importantly, we’ll try to give you some tools to try and fix those challenges.

 

Most Common Trading Mistakes

There are two things that traders think they suffer from the most – over-trading and over-leverage. But these are just the edges of a much larger problem, these are just the actions, they’re like the symptom of the illness that we need to identify, there’s something behind this conduct causing traders to eventually get into over trading or over leveraging and that’s what we want to understand.

Here are some examples of charts, every chart tells a story-

Over leverage

Over leverage

This is an $80k account, we can see very small profits for a while, and suddenly a huge loss that ends up, stopping out the account. So this is clear over-leverage or revenge trading or over-trading that caused it to this. It could be a result of a lack of patience, the trader was feeling impatient and wanted to profit quickly but ended up taking big losses.

Lack of patience

Lack of patience

Something similar here, a $10k account, the dotted line is the equity line and the blue line is the balance line so you can see over the little gains there was a huge drawdown on the equity, and even if after closing the trade the balance was positive, this trader was taking a lot of drawdown in order to get small profits. Getting disciplined enough in order to maintain a strategy that is taking so long in order to give you results might be frustrating and trigger some emotions that cause the trader to wish for bigger returns, then open up a trade that eventually was a big loss and wishing to recover fast, the trader blows the account.

Overconfidence

Overconfidence

Same here – we can see a nice balance but also the equity that is in drawdown a lot of time and see how close was this trader to get to the target, it was just a few hundred dollars away, at this point he or she felt overconfident, wanted to get to the target as quickly as possible, followed by a big loss they wanted to recover from quickly and you can see the rest on the chart.

Over-size

Over size

Something similar here, a trader who’s in drawdown and recovers from the drawdown, he’s doing fine and wants to get quickly to the target so he increases the lot size which leads to a big loss.

Negative risk-reward

Negative risk-reward

Same here this looks to me like a martingale system, there are many small profits and then a big loss, and again –  many small profits and then big loss. Then there’s a big win which leads to overconfidence, the trader wants to get quickly to the target – makes a bigger trade, gets a big loss, and then comes the stop out.

Every chart has a story behind it and we can see different causes or different triggers. It might be an emotion, might be an expectation, might be lack of discipline, lack of consistency, lack of trust in the system, greed maybe, overconfidence that eventually causes or triggers either over-leverage or over-trading that leads to losing the account.

 

Unrealistic Expectations

Let’s talk about possible causes for common trading mistakes of over-trading and over-leverage which are unrealistic expectations. If we explore that a little bit further, I see unrealistic expectations in three aspects: unrealistic expectations about success, unrealistic expectations about results, and unrealistic expectations about time.

Unrealistic expectations about success

As humans, we might enter the trading world thinking of success in a linear way when we just always improve, and eventually, we will get to the top of our skill or our trading career.

linear success

When in trading success really looks like this

Forex success

It’s a very hard long way, partially because we, as humans, are used to doing some action and getting some result of that action. In mathematics 2+2 is always 4. If I play an instrument, every time I play a certain note will always sound the same. But here in trading sometimes we think we’re doing the same action, we’re following our system or strategy, we have a signal in our strategy and we don’t get the same results, sometimes those trades result in a win, sometimes in a loss and it’s very hard to measure success or progress when we don’t have that positive feedback from the market.

Our expectations about what success should be in the market are very different from what we experience in life. We feel that we’re not progressing. That’s why here at The5ers we speak about shades of success. When we talk about success we really think success is constant progress towards better trading every time.

Be your own benchmark

How can we define what success is for every one of us? We need to be aware that we improve every time and constantly. The fact that we all have different backgrounds, different account sizes, different skills, different time availability, it’s a very different path that every trader has to go through and you need to start measuring yourself against yourself, you need to start comparing yourself to your past-self and then to see if you have made any progress or not.

Be your own benchmark, stop comparing yourself to others and start comparing yourself to your results from 100 trades ago or one month ago, or one year ago. Are you a better trader or a worse trader? Acknowledge that progress. Success is very relative in trading. If you were a losing trader and now you are a break-even trader that’s a kind of success. If you’re a break-even trader and then you become a consistent trader, that’s better, and from consistency to profitability that’s even better, but that will take time.

Now when we think of results of course there’s the money and there are the returns, we need to think about what’s realistic, what’s our account size, and what we can get from that. We cannot expect from a very small account to get a lot of money, that’s something that is just not realistic. You already know that so we need to think about our outcome results in a realistic way, and not think of trading as a profession that can give you millions of dollars very quickly or with a small account because that’s just not realistic.

The same applies to time. Think about a university degree, we invest years of our lives in order to get professional at something, and for some reason, we want to get immediate returns and immediate success and we need to remember that trading will require years of preparation so you need to commit time. You might have heard of the 10,000 hours to master some skill so maybe you need to get 10,000 trades in the market to get professional at it and you need to take into account your available time. You might have another job so you have to trade off the larger time frames and you will have fewer setups and fewer opportunities and if you have time available to practice you will have more available time for practicing and maybe your path will be shorter, but again we need to understand what’s our reality and what’s our available time for practicing and we cannot expect to get success in trading in less than six months, one year or two years. Less than that is very unrealistic.

Wrong focus

Another thing that we see many times with traders – they have the wrong focus. They focus a lot on the outcome instead of focusing on the process. They cannot distinguish between lucky strikes they had and consistency. So they give a lot of weight to good trades or profitable trades that they had here and there instead of trying to get consistent over time. It’s similar to the movie “The money ball” where they are trying to recruit baseball  players based on their statistics and their consistency.

 

Wrong focus

What we need to really focus on is our process instead of focusing on the outcome. Because if we focus on the outcome of trading, on the money, we will focus on over-leverage, we want to take the one single trade that makes a lot of money instead of trying to focus on the process, on developing the skills and the consistency that eventually will give us the outcome.

 

Controlling Your Emotions

All along the way we have emotions involved, we feel frustration – so we might revenge trade; we feel greed – so we might over-leverage, we might feel fear, we might feel fearless so we go and over-leverage and over-trade. Our emotions are involved during the whole process and we need to acknowledge that as well. What we need is basically to get to an integral solution, We need to break this vicious cycle and start developing good habits when we want to change bad habits.

Let’s start with some ideas- there are no more important or less important ideas here, the most important thing is to take one of these ideas and start today with one of those, come back later and read this again and once you have one of those checked, then you can take another one of these good habits and start developing.

The most important thing is to choose one of the ideas I will give you now and start with that.

Reduce lot size

A good idea to improve your trading is to reduce your lot size, this idea is that if you were risking just one single dollar in every one of your trades and you would lose the trade, that one dollar loss won’t make you feel the need to revenge trade in order to make back that dollar, one dollar would not be a painful loss for you, so that wouldn’t trigger you with the need to over-trade or to over-leverage in order to make that one dollar back.

The best way in order to develop consistency, to not focus on the outcome but on the process, is to reduce your lot size, to start to focus on improving your statistics – your ratios, your win ratio, your risk-reward ratio, and once those are positive then you can start increasing your lot size in order to get an outcome and get money off your good process. You need to reduce your lot size so you don’t get emotionally attached to any one of your single trades. That would be a good exercise to do if you feel that many times you are over-leveraging or over-trading, that might help with that.

Develop a trading plan

Unrealistic expectations? why not develop a trading plan? A training plan is not only writing down your strategy. Yes, writing down your strategy is super important, it is your map to follow but a trading plan has to include your expectations based on your own situation: what’s the time you have available, what are your own life objectives, and the lifestyle that you want to live, what income you need, so for that income what account size do you need in order to make that in a consistent way? so you really need to have a real and complete trading plan in place and you have to have the discipline in order to follow it so you don’t go thinking of trading in an unrealistic way.

I’ll give you another tool for that, if you don’t have a trading plan let me give you one here – it’s a short version of a complete trading plan we have so if you fill in your email in the link, you will get to your email a reduced version of a trading plan that will help you get started: The 5%ers trading plan pdf

It is very very important, traders really think they can just get into the market and out of the market and they don’t follow a plan, they don’t follow something written down.

Backtest

You need to be able to trust your strategy and in order to do that you first need to backtest it to see if there’s some potential in it, then adapt it, tune it to yourself, and then forward test it.

A real test of that strategy is not to make money but to gain trust in your strategy and to know that in the long run, your strategy makes money. If your strategy is working, it has the potential, it’s a profitable strategy then you only have to work on the other side of the system which is the trader, which is you. In a system we have a trader and the strategy, so by backtesting and forward testing we can have no emotions in order to make sure our strategy works for us, and once we know that, we can trust it and the trader part of the equation can feel more confident taking those trades and those signals and it will be easier. So backtest, demo-trade, and forward test and build confidence in your strategy.

Find a mentor or a community to be accountable to

The most valuable thing here is to externalize your thoughts. Once you hear yourself thinking or saying what you think is your problem you become accountable to someone. It’s similar to going to the gym or going to a nutritionist, you know you will meet your coach or your mentor or your group or whatever the next week or in two weeks, you have a commitment, so you need to find a mentor or a community to stay accountable to.

There are plenty of forums in which you can find a community, we have a trade ideas page where you can try to find a match or a friend and the key message here is to stay accountable to someone that will help you with the discipline. Once you have to take a trade or not to take a trade and you know you should not take the trade once you think you will have to explain that to someone else in the future, and then you won’t take the trade you shouldn’t. Another benefit of a trading community is seeing common trading mistakes that happen to others and learning from those.

Meditate

I don’t know if you connect with that, you don’t have to go to mindfulness or any specific thing but just breathe. Relax your mind, breathe before your trading session, breathe during your trading session, and breathe after the training session. Keep your mind relaxed, that will help you with the emotions.

Ray Dalio said that he started meditating and so did Warren Buffett and many other big traders. You can try just a few minutes of breathing exercises before you start trading, it can really help you out.

Beware of social media

I know it’s hard, but you need to beware of social media, especially when you see fancy cars and traders showing profit months of $100,000, that’s unrealistic. Most of those are fake, they’re just looking for traffic into their channels to get revenues from youtube or tick-tock and those posts really cause you to think you can get those same results, and we don’t know if they’re even real, their strategy or their system might not be the one you need. So you really need to stop comparing yourself to what you see on social media, which only causes a lot of stress. Compare yourself to yourself, you are your own benchmark.

 

Common Challenges Webinar

We also prepared a special webinar that uncovers what traders suffer the most during their careers and gives practical tools to fix it.

 

Common Trading Mistakes Summary

In order to defeat the common trading mistakes I’ve listed above, you should start developing good habits in order to get rid of bad habits. Make your good habits stronger and this will make your bad habits disappear. As always, we wish you success!

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