In the Forex market, all of those who join the ranks of traders do so intending to make money from Forex trading. But the reality is that only a few will end up being profitable.
What causes the majority to lose money, and how does the small number of profitable traders make a difference? Here is one of the worst mistakes made by new traders on Forex and how to avoid it.
The Worst Forex Trade Mistake – Overtrading
If making money is your sole goal at the start of your trading career, the pursuit of money will soon become the very cause of your failure. It is an experience that newbie traders are used to. So, keep in mind that any trading plan is built with a long term view. Having in mind only the instant profit usually results in the total loss in the trading account balance. It can happen in one of the following ways or by combining them: over-trading and over-analyzing.
Overtrading usually occurs because of low or insufficient initial capital, which results in trading using volumes that are too high compared to the account balance or may come from a trading addiction, which results in too many trades made by the trader.
Start with sufficient capital
First and foremost, start with sufficient capital to trade. Forex trading was designed for highly leveraged accounts. Not having enough capital to manage only increases the chances of losing all of the capital. A Forex trader must always decide how much money he is willing to risk per position, and he must define this amount before taking a position in the markets. Generally, only 1%. 2% is the maximum amount that is reasonable to invest per position. And what percentage for the total committed capital, the total open positions? It’s 5 to 7%. Such careful management of money and therefore risk will allow you to accept losing trades and mistakes that are simply unavoidable in the process of learning Forex trading.
The starting amount to invest in Forex
So, how much should you start with then? Here is an example. If you are trading 0.01 lot (a micro lot, or 1000 currency units), which is the minimum Forex trading volume a broker can offer, you should have at least one thousand USD investment in an account. With a leverage factor of 1: 100 to be able to withstand opening only one position at a time. And for this position, you cannot set a stop loss higher than 50-60 pips, which is a total risk of 5-7%. And we are talking about a fixed stop loss, not a psychological stop loss, because as soon as the price goes through a psychological stop, a trader starts to adjust their decisions, turning more away from a fixed trading plan.
Stop over-analyzing the market
The markets are moving, the flow of money is real, and everything is happening in real-time. And that should not dictate your trading, however.
Taking positions comes at a cost. To increase profits, the average trader will follow his strategy roughly, taking positions when he should be patient and cutting positions when he should be doing nothing. Over-analysis comes with over-trading. It seems to be one of the biggest mistakes. Forex traders believe that they are in control of the market. But they don’t control it. Successful trading is a lot like fishing, where the fisherman has no control over the fish. There’s not much you can do until the fish grab your bait. Once the market prices are fair where you want, you take your trading positions. Before that, all you can do is sit still.