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In this episode, you’ll discover the top 5 forex trading mistakes that newbie traders make (that you must avoid).
So listen to it now…
Resources
The 7 Biggest Reasons Why Traders Fail
Is $1000 Enough to Start Trading?
Why You Lose Money with Trading Indicators
Transcript
Hey, hey, what’s up my friend?
In today’s episode, I’m gonna share with you the top 5 mistakes most newbie forex traders make.
Mistake #1: Assuming you’ll make X pips each day
“Hey Rayner, I want to make 10 pips a day man. I’m not greedy, all I’m asking is just 10 pips a day! Afterall the GBP/USD moves 100 pips a day!”
Now here’s the deal, it doesn’t matter how many pips you want to make. For you to make X number of pips a day, your trading strategy has to work. It must be able to take advantage of certain market patterns under certain market conditions.
For example, if the market is in an uptrend and your trading strategy is a long strategy that buys high and sells higher by buying breakouts, you’ll make money. Or maybe if you buy on the retracement and you sell higher, you’ll make money.
Because that uptrend market condition is suited for those trading strategies that you’re using. So you’ll make money. But guess what? Market conditions change. It could be in an uptrend for the last 5 or 10 days, but it’s not gonna go up forever.
It’ll eventually go into range or a downtrend. Here’s the thing, you’ll never know when that will happen. So you could be making no pips consistently for many days when the market conditions change and your trading strategy stops working.
You’re not gonna make consistent X number of pips each day until you can adapt to the new market condition.
So first and foremost, don’t focus on making X number of pips each day. Yes, you should focus on making money. But you should also focus on containing your losses such that you’ll make good money on the good days and also have enough for the rainy days.
That’s how this game is played. It’s not all about making a certain number of pips every day because that’s just not going to happen.
Mistake #2: Thinking you can trade full-time with a $1,000 account
There’s this thing called leverage, where you can leverage your $1,000 trading account. If the leverage is 1:500, in essence, you’re controlling $500,000 worth of currencies. Well, if you haven’t realized by now, leverage is a double-edged sword.
Yes, you can make more money because you seem to have more money. But at the same time, you can also potentially lose more money and your losses can even be amplified further than not using leverage.
Don’t get the wrong idea that just because you have a 1:500 leverage, you can trade full-time with $1,000 account, that’s not gonna happen. Because when your losses come, it can easily wipe out your profits and more.
Don’t have this fixed idea that a $1,000 is all you need. You really need much more than that to trade full-time. And on top of it, we also talking about having the skill to be a consistently profitable trader. That’s something that’s required as well, not just the size of your account.
Mistake #3: Focusing too much on indicators
Most new traders focus a lot on indicators because they’re sexy. You look at your charts, the lines go up and down, so it seems fun and exciting.
But take a step back and think, how are those indicators derived on your chart? If you think about this, indicators are derived from the price, either from the open, high, low or close of the price.
When you apply a mathematical formula to the price, you’ll get your indicator value. And when you see the indicator values to make buy or sell decision, you’re usually one step behind someone who can just read off the price charts.
I’m not saying that indicators are bad. They have their uses for trade management, trailing stop loss and stuff like that. But if you solely look at indicators to make your buy or sell decisions, then you’ll always be one step behind someone who reads off the naked chart.
Mistake #4: Micromanaging your trades
Let’s imagine this…
You’re a trader who trades on the daily timeframe and you have a valid trading signal so you went long. But what happens is that you start to get anxious because the market isn’t moving very much, and it even slowly retraces against you.
Then you start to panic and sweat. What do you do? Well, you start to analyze the price action more deeply. You go to the 5-minute timeframe and see how the price action is like.
When you jump into the 5-minute timeframe from your entry timeframe, which is the daily timeframe, you’re going to get scared out of the trade because the retracement against you on the daily temporary will look like a freaking downtrend on the 5-minutes chart.
And you might think, “Oh, the move is over. Let me get out of the trade, take a small loss and move on.” But right afterwards, the market reverses, rallies and hits your target profit. That’s because you were micromanaging your trades.
Here’s the deal:
If you trade on the daily timeframe, the lowest timeframe that you want to manage your trade is on a daily timeframe. Don’t go down to the 5-minute or the 15-minute charts, because more often than not, you’ll scare yourself out of the trade.
Mistake #5: Focusing solely on winning rate
Many new traders think their winning rate is everything, looking for strategies with a minimum of 70%, 80%-win rate. Here’s the thing, you can have a 90%-win rate strategy, but in the long run, you could still lose money.
You might be wondering, “Rayner, how is that possible?” Well, let’s say you have a strategy that wins 9 times out of 10. Each time you win, you win $1. But on that one time when you lose, you lose $50.
If you do the math, that one loss will more than wipe out all your open profits that you have accumulated over time. That’s why you shouldn’t just focus on your win rate only. You should focus instead on 2 things:
- Your winning rate
- Your average gains to average losses (otherwise known as your risk-reward ratio)
That’s what gives you the complete picture. Because the first one tells you how often you win, and the second tells you how much you win when you’re right and how much you lose when you’re wrong. And that tells you if you have an edge in the markets.
Let’s have a quick recap.
Recap
1. Forget about making X number of pips each day
Because that’s not how it works. Instead, focus on trading well and making as much money as you can when market conditions are favourable to you. Playing good defence when market conditions turn against you.
2. Forget about trading full-time with $1,000 account or a $500 account
Having leverage doesn’t mean you can stretch that account to do whatever you want to. It’s not going to happen.
3. When you first started trading, don’t focus on indicators – focus on price
Because the indicators are a derivative of price. Once you understand how the price action works, then yes, you can look into indicators to for trade management or risk management, etc.
4. Don’t micromanage your trades
If you trade on the daily timeframe, the last thing you want to do is go down to a lower timeframe, like the 5-minute timeframe to micromanage your trade because you’ll probably scare yourself out of the trade.
5. Don’t just focus on your winning rate
It’s your winning rate combined with your risk-to-reward which gives you the full picture With that said, I wish