7 Major Trading Mistakes

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Contents

Top 7 Trading Mistakes Forex Traders Make

The rewards in Forex trading are high, but so are the risks. You need to be mindful of the pitfalls when trading in the Forex market. Successful currency trading requires that you not just make the right moves, but also avoid wrong ones.

Many newbie Forex traders end up losing a lot of money due to making mistakes that could have been avoided with a little oversight.

You can’t afford to make mistakes in Forex trading since the stakes are so high. A slight unfavorable movement in price could wipe out thousands of dollars if you don’t take corrective measures.

Table of Contents

In order to help you avoid mistakes, here we have listed seven common forex trading mistakes that inexperienced Forex traders generally make.

Forex Trading Mistake #1 – Not Having a Plan

One of the common mistakes that many new Forex traders make is jumping into a trade without a plan. Without a clear direction, they end up making bad moves losing a substantial sum in the process.

You need to write down a precise strategy on which currencies you will trade at what time frame. In addition, you should note the amount of capital you will risk in order to make a profit.

The trading plan should serve as a map of how and when to trade. The plan should clearly outline the risk you are willing to take and how you intend to enter and exit the trade. You should also test the strategy in a demo account before trading for real.

In case you don’t make a trading plan, you will be gambling your money. It will most likely result in huge losses wiping out your entire capital in just a few days.

Forex Trading Mistake #2 – Not Using Stop-Loss Order

You should use a stop-loss order for every trade. Not using this option will result in significant losses in the event of an unfavorable price movement.
With a stop-loss, the order will close once a specified price is reached.

A stop-loss will ensure that you get out early in case of an unfavorable movement in prices. Placing a stop-loss will protect your entire capital from being wiped out in the event of a losing trade.

You should place a stop-loss at the time of entering the trade. This is an important risk control measure that could minimize the losses suffering due to unexpected price movements.

Forex Trading Mistake #3 – Ignoring the Risk-Reward Ratio

Risk-reward ratio indicates how much you earn for every $1 invested in the trade. If your average winning trade is $100 and the losing trade is $60, your Risk-reward ratio is 1.67. This means that you have gained $1.67 for every dollar invested in Forex trading.

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The risk-reward ratio over a period should bemore than 1, otherwise, you will be making a loss.

However, many newbie Forex traders keep on trading without knowing whether they are making a profit or a loss over a period of time. Only once their account is empty do they realize about the extent of the losses.

To avoid this prospect, you should mention the risk you are willing to take to earn a reward in your trading plan and keep a close eye on the risk-reward ratio as you trade.

Forex Trading Mistake #4 – Risking a Large Sum

Unless you are a big trader and can influence the currency prices similar to how George Soros broke the Bank of England in 1992, you shouldn’t ‘go all in’ and risk a large sum on a single trade.

Successful Forex trading requires a lot of patience. When you risk too much of your capital on one trade, you will fall into the ‘regret’ trap. In case of unfavorable price movement, you may feel regret and cancel a stop-loss order in the expectation of a reversal of price movement. You can avoid making hasty decisions fueled by emotions if you create a risk management strategy and stick to it. Don’t risk more than a 1 to 3 percent on a single trade.

Your losses will be great if you risk 5 percent or more of your amount on one trade. Focus on making small wins over a large number of trades, instead of trying to make a windfall from one or few trades.

Forex Trading Mistake #5 – Adding to a Losing Trade

A problem with risking a large sum is falling into the trap of averaging down. When seeing an unfavorable movement in price, many new Forex traders add to a position in the hope of making a larger profit when the price turns around.

Adding to a losing trade is never a good idea. In most cases, prices don’t reverse in the short period. It usually takes months and sometimes even years for a particular price trend to change.

Remember that small losses are easier to recoup as compared to large losses.

The best course of action when the price movement reverses is to end the trade after a certain point, which should be the stop-limit order. The losses will only get bigger the longer you wait to close the account after a price reversal.

Forex Trading Mistake #6 – Not Verifying the Broker

You will be trusting all your money with a Forex broker. So, it’s critical that you select the broker carefully.

You can lose your entire money if the broker mismanages your money or is in any sort of financial trouble. Also, some shady brokers try to dupe money out of clients through trading scams.

To ensure that you hand your funds to a trusted broker, you should read online reviews on discussion forums and review sites. Make sure that most of the reviews about a broker are positive.

Also, you should test the broker by creating a demo account. If the demo account works well without crashing or delays in trade execution, you should open a real live account with a few hundred dollars. Trade the real account for at least four weeks before putting a large sum in the account.

Forex Trading Mistake #7 – Not Diversifying the Trades

Diversification is as much important in stock trading as Forex trading. You should diversify the trades by selecting pairs that are not correlated.

In other words, all the currency pairs should not move in the same direction. Instead, you should consider investing in pairs that move in the opposite direction. For instance, EUR/USD and USD/CHF generally move in the opposite direction.

Diversifying trades will help you minimize the losses in case of unfavorable price movement. If you order multiple trades, you should select at least one pair that moves in the opposite direction.

Summing it All Up

To be a successful trader you need to have a clear trading plan. The trading plan should clearly show your risk appetite or tolerance for losses. Moreover, you should minimize the losses by placing a stop-loss order, avoid putting a large amount on one or few trades, and diversifying your position.

In short, Forex trading requires constant vigilance. You need to carefully monitor your trades and make timely decisions. A slight oversight could end up costing you a lot. You can avoid potentially devastating mistakes with trading discipline, knowledge, and developing a game plan to avoid mistakes. This will ensure that you have a positive trade journey making money along the way.

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13 Trading Mistakes to Avoid at All Costs

We’re all human. We’re driven by our emotions, especially fear and greed .

That’s why you can memorize chart patterns until you’re blue in the face, then watch them blow up the next day. Those are tactics .

You’ve got to get the strategies right. If you want any chance of success , you need to know all the rules first.

Not only do you need to learn what to do, but you also MUST know what to steer clear of. That’s what this article is about. I’m sharing 13 mistakes that traders need to avoid like the plague.

Learn them and stay away from them !

Let’s get started …

Table of Contents

The 13 Trading Mistakes Traders Need to Avoid at All Costs

Sometimes traders get so caught up in their trading that they forget everything else. Don’t be one of them! These are common mistakes that stock traders don’t need to make.

Trading demands focus, discipline, and knowledge. You must internalize these strategies .

#1 Buying Stocks Without a Plan

A lot of new traders enter a trade and hope the stock price increases as soon as they enter.

Anyone who has traded knows this rarely happens.

But this fact doesn’t stop beginners. If the trade starts moving against them, they’ll let their emotions take over as they find reasons to convince themselves the stock price will increase.

Next thing they know they’re down 20% from where they entered.

Reluctant to sell and take the loss, they keep holding. And the price keeps dropping and now they’re bag holding .

In other cases, a new trader may enter a stock and the price increases. They don’t sell and take profits because greed takes over. Soon enough, the trade moves against them and they’ve turned a winning trade into a losing one.

These trading mistakes are the result of not having a plan before moving into a trade.

When you enter a trade, you should be able to answer these questions:

  • What am I seeing on the chart that is making me go long or short ?
  • What are my price targets?
  • How much of my money am I willing to risk?
  • At what point does this trade move against me and make it so that the trade cannot work in my favor?

If you can answer those questions, then you can set your plan with entry and exit points .

If you can’t answer those questions, don’t make the trade!

#2 Shorting Hype Stocks too Early and Getting Demolished on Your Shorts

What goes up must come down. That’s particularly true of stocks being pumped and dumped by scammy promoters.

I’ve enjoyed riding on their coattails. When I spot a stock in the very early stages of a pump, I’m glad to buy and ride along as it goes up.

And when it’s going to go down, sometimes I profit by selling short .

But you have to watch your timing. Don’t sell short too soon! Remember, hype can keep pushing a stock’s price up much longer than you can avoid bankruptcy.

You need to find where the “top” is on a stock. This starts with finding resistance levels and finding when buyers are leaving and sellers are starting to take over the stock.

For more info about short selling, check out this video I made:

#3 Not Cutting Losses Quickly

This is the biggie. This mistake probably counts for most of the money traders lose .

That’s because it’s such a common, typical human failing. We don’t want to admit we’re wrong. And in many of life’s situations, it’s even a good thing. Lots of people get by just fine refusing to admit their mistakes.

As a trader, you can’t afford that. When you make a mistake, get out … like, five minutes ago.

You will never be 100% correct on your trades. I’m not. After trading and studying the markets for twenty years I’m right about 74% of the time. That’s good, but it means I’m wrong 26% of the time .**

I haven’t blown up my account yet because I admit I’m wrong — and I get out, fast . A trade isn’t a fight for something you believe in!

You need to predetermine your risk when you enter a trade. (Remember the plan I wrote about in #1?)

  • What’s the risk to reward ratio?
  • How much are willing to risk?
  • Once you know what you’re willing to risk, enter the trade and set your stop loss.

I’ll be the first to admit that it doesn’t feel natural to enter a trade that you think will be profitable and immediately set a stop loss, but it can protect you from incurring huge losses to your account. We’ll get more into stop losses later on in this article.

#4 Buying Stocks With No Volume

As a stock trader, you’re given information about the stock price and the volume.

But most beginner stock traders only look at the price and completely ignore volume. This is a serious mistake.

Market makers can move the stock in one direction on very little volume. You may see a stock up 10%, but if you look at the volume traded you see it’s only 5,000 shares. Avoid these traps by remembering that volume validates price .

If a stock is moving strongly in one direction or the other, it needs to be accompanied by strong volume.

Think about it this way: It takes a lot of effort to move a stock. That effort is the volume. Stocks can’t move on zero volume, and they shouldn’t be moving strongly on low volume. If stocks are moving on low volume, it’s hype. Avoid hype.

Always look at the price action and confirm it with volume . And never forget that volume validates price.

#5 Not Keeping a Trading Journal

When you think of trading, “journaling” isn’t something that usually comes to mind.

You note when you enter a trade and exit with a profit, then move on to the next trade. Right?

Nope. You have to keep a journal of ALL your trades — the good, the bad, and the ugly.

Take screenshots of the chart and the setup that you got you into each and every trade. Write down your thoughts on why you liked the chart and entered the trade.

Then write down when you exited the trade. Study your entries, exits, and timing . Learn from your success and failures. It’s one of the best ways to improve as a trader.

To learn more about how you can create a killer trading journal, check out this post .

#6 Trading Too Large Position Sizes

When you’re trading, always keep position size in mind. Don’t risk too much of your total trading account on any one trade!

When you’re just starting out you may have only a small stake to begin with. Even so, never risk your entire account on one trade unless you’re prepared to totally start over again.

You may love a chart and think the price will increase, but what you think doesn’t matter to the market. Use good judgment and proper risk management practices. Don’t pour all your money into one trade.

Test your trading strategies and rules with small position sizes. Make 50–100 trades to gauge your win rate. Once you know that, you can gradually increase your position size and refine your strategy along the way.

#7 Trusting Stock Promoters

Look, I hate to be the one to break this to you, but there’s no Santa Claus. No matter what your parents told you. And no Easter Bunny either.

I’d rather you believe in Santa Claus than trust in stock promoters .

Their job is to pump up stocks to drain all the money out of your account. Don’t join their email lists. Stay away.

After the promoter has convinced every sucker to buy the stock, they will sell their shares. Their profits come out of your trading account! Falling for their bullshit is one of the stupidest mistakes traders make.

#8 Trading Difficult and Unclear Patterns

Look at a typical stock chart. It’s not really mysterious. It’s very exact. It shows precisely the stock’s price history. Those points trace out clear, straight lines.

It’s like a picture deep inside the mind of the market, showing exactly what the market has thought of this stock.

The patterns I teach work well, but there’s a temptation to see patterns in the charts that aren’t really there . It’s not really a cup and handle , but it looks sort of like a cup and handle, so you run with it.

And then you wonder why you keep losing.

We’re all human. We’ve all thought we were in love with someone we thought was our ideal, but it turned out that person wasn’t “the one,” and that broke our heart.

Lucky for us, stock charts aren’t as hard to figure out as human beings. Stick with the patterns and indicators that are clear and unmistakable .

#9 Ignoring Indicators

The technical indicators are telling you a story about the stock, and you can’t afford not to read what it’s saying. Buy breakouts and sell breakdowns .

When the indicators tell you a trend is close to its top, take your profits . Get out of the trade.

When the indicators tell you a stock is not ready to trade yet, stay away.

Bottom line: You need to stick to your trading plan.

#10 Letting Emotions Take Control of You

The financial markets are a perpetual battle between the bulls and the bears.

When a stock’s bulls outnumber the bears, the price goes up. When the bears are stronger than the bulls, the price goes down.

And the same battle plays out in your mind, your heart, and your gut. It’s the constant push-pull of fear and greed.

That’s what leads you to make psychological trading mistakes: You let your emotions overrule your mind .

You can’t turn yourself into a cyborg trader, and that’s good. You have to harness those emotions so they serve you .

Greed is a good thing when it motivates you to work hard to learn to trade because you want to support your family, achieve financial independence, and live the laptop lifestyle.

Fear is a good thing when it prevents you from putting on stupid sure-loser trades, when it keeps you from overtrading your account, and when it tells you to close out a losing trade before you lose more money.

Stay in control. Use your head so you always know when it’s useful to feel greedy and when it’s dangerous to ignore fear.

#11 Entering a Trade Based on Your Gut

This is similar to Mistake #10. When a gut feeling is your only reason for entering a trade, that’s one of the trading mistakes too many people make while trading stocks.

It’s greed and hope controlling you instead of facts — instead of the objective reality of the chart and the market. It’s a form of fantasy. Fantasy is for books and movies, not trading penny stocks.

First, learn the main patterns and how to recognize them in a stock chart. Learn to follow trend lines. Buy breakouts and sell breakdowns. Learn from your mistakes by keeping a trading journal.

Establish the discipline of following your trading plan. When you have a good set-up, force yourself to look at it closely and analyze it before you pull the trigger.

Is it real or is it hope? Is it real or is it hype?

Allow yourself to feel the fear of losing money because you fell for a fantasy.

But once you’re sure it meets the objective criteria for a good trade, then go for it.

#12 Neglecting Stop Orders

A solid way to prevent excessive day trading losses and potentially lock in some profit when you have a winner is to make sure you set stops on every single trade .

I cover the details of how to set stop losses and trailing stops in another post. Check it out.

If you stay glued to your computer you might think you don’t need them. But sooner or later you’ll get distracted by another trade, the news, lunch, or a sudden need to rush to the bathroom. Hey, too much coffee or a stomach virus can happen to anybody.

When a stock loses support and everybody wants to get out in a rush, it can fall a lot faster than you can get your sell order in. That can wipe all your profits and much more. Set your stop-loss order as soon as your trade is filled . And like I said before, you need to predetermine this risk before you even enter the trade.

#13 Lack of Preparation

Trading stocks is not school or a lousy job. If you’re attracted to trading, you probably didn’t like teachers and bosses telling you what to do. You’re a contrary personality. I get that. It’s good, if you can harness that aspect of your personality. I’m there myself.

But if you want to succeed at trading, you must become the strictest, hardest-ass boss you’ll ever have in your life: you.

And you also need to be your boss’s hardest-working student and employee.

It takes discipline. Some people can’t handle it. They’d rather goof off and watch TV or drink too much or buy too much shit online or whatever. They’re not ready to sacrifice time and effort now to potentially grow their money.

But a major part of trading is preparing to trade .

Create your watchlist. I’ll even send you my watchlist every Sunday night . So you have no excuses.

Go through your scans of the largest percentage gainers. Look at what patterns have and have not been working. Build a watchlist and diligently tend to it.

You know the drill, so do it. The more trading experience you gain, the more you’ll develop this automatic habit.

Trading Challenge

When I started out as a trader, I wish I’d had someone to help me figure out what trading mistakes to avoid. Instead, I had to figure it out the hard way because there weren’t any great resources out there.

I want to make trading more accessible to others by becoming that resource for my students.

I created my Trading Challenge so that my students don’t have to go through the learning curve of the stock market the hard way.

There’s so much confusion and so many mixed messages out there that it’s hard to know what’s what. It’s why many traders get frustrated and quit before they realize their full potential. But it doesn’t have to be that way!

I want to help others learn my techniques to potentially take advantage of them, too. As a teacher/mentor, I’m actively trading with a small account alongside you so that my teachings can be super specific and tailored to the market as it is right now.

If you’re just getting started or your trading isn’t where you want it to be, my Challenge could be right for you.

Bottom Line

Trading isn’t easy, and that’s good. If it were easy, it wouldn’t be fun — or potentially really friggin’ profitable.

I’ll say it again: we’re human. And we all come with brains and nervous systems that didn’t evolve to make us perfect traders.

We all have cognitive biases — we don’t see reality straight on. And those that think they do are kidding themselves in a huge way. We’re designed to gather and hunt food, not stare at numbers and graphs all day, thinking about trading accounts and the future.

Do your research, practice, and learn. Keep your emotions under control. Some greed is good or you wouldn’t want to trade stocks. Some fear is good or you’d lose all your money. Just don’t let your emotions overturn your trading knowledge.

Yeah, that’s easy to say, but it’s hard to do when the markets are open and busy. But once you practice and get the hang of it, you’ll be really glad you did.

Now that you’ve learned these mistakes, think about them and figure out how many of them you’re making . Be honest with yourself; your financial future is at stake here. (And don’t just keep them in your head; write them down in your trading journal!)

Not losing money by making these mistakes is way over half the battle. Making a potential profit by finding a few winners can be easy compared to eliminating these problems. Start your discipline regime now.

Are you making some of these trading mistakes? What’s your biggest culprit? Share your comments. Your story could help other traders — and that, in my opinion, is what it’s all about. So sound off below!

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Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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      Comments ( 12 )
      Hey Everyone,

      As many of you already know I grew up in a middle class family and didn’t have many luxuries. But through trading I was able to change my circumstances –not just for me — but for my parents as well. I now want to help you and thousands of other people from all around the world achieve similar results!

      Which is why I’ve launched my Trading Challenge. I’m extremely determined to create a millionaire trader out of one my students and hopefully it will be you.

      So when you get a chance make sure you check it out.

      PS: Don’t forget to check out my free Penny Stock Guide, it will teach you everything you need to know about trading. :)

      Great post Tim haha… same hoodie…

      some real good information. Really now ‘the pattern’ or the ‘the chart’ we play is so plain Ray Charles could see it.

      Look forward to becoming one of your students Tim.

      that was a great supplementary video by Sykes’ student (rule #4!

      The last line was the most important one!

      Get free services with 2 days free trial
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      Great post, thanks Tim. I am being honest with myself and I know the mistakes I am making and working on improving myself. Cheers!

      Thank you so much I will try my best to avoid all of these mistakes but controlling your emotion can be hard that’s my only weakness in trading because it can affect my decision making. I have no problems regarding getting good signals cause FX Leaders does that for me.

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