The 21st century is full of rags-to-riches success stories of the newbie trader who has made a fortune trading Forex and CFD (Contract for Difference) markets. And many of these stories are true, and there are still others who have made decent amounts over time. However, many individual traders have a very different experience of trading. They enter the world of financial markets and believe the streets are paved with gold and that this is a way to get rich quickly. The reality is that most individual traders lose money when trading.
So how do you become one of the success stories or at least make a decent return on your investment over time? How do you avoid being like most traders who lose money over time or potentially very quickly?
In this article, we will go through some common mistakes that retail traders make, the dues and don’ts of trading, to give you some helpful tips. We are going to look at:
Common mistakes that retail traders make
1. They think trading is easy
One of the most common mistakes that new retail traders make we have already touched upon. They think it is easy. They see the bright lights of the trading world and read the many success stories and get rich quick schemes that are everywhere online. They get overcome by the euphoria of potential success and fail to see that trading is NOT easy. If it were easy, everybody would be doing it successfully and making huge profits. The reality is far from different. So the first mistake is to avoid being overconfident and to fall into the trap of thinking that trading is going to be an easy option. It is not!
2. They dive in
We already looked at the fact that financial markets trading is exciting, and alongside the anticipation of making lots of money, the new trader is often keen to start quickly and make money quickly. This is a common mistake that many retail traders make. Although the temptation is to open a live trading account and start trading with real money straight away. Like any skill, or a sport for example, trading takes time to learn, and the best place to learn, staying with our sport analogy is on the training field. You would not take up a sport and go straight in and play that sport competitively without at least doing some practice first, would you? The same as for Trading. And where can you practice? Well, with Hantec Markets, you can open up a demo account to learn how to trade before you actually start. Click here to learn more about opening a demo account with Hantec Markets.
3. They choose the “wrong” broker
What do we mean when we say choosing the “wrong” broker? Just like in any industry there are good and bad brokers, and some of the bad are very bad! We did not want to point fingers in this article, but for the new trader, the safety of your deposit is extremely important. It is hard enough trading anyway, but you do not want to lose the money because it’s been taken from you or because of some technicality in the T&Cs. For this reason, it is advised to only open an account with a broker that is regulated at the highest level, for example, by the Financial Conduct Authority in the UK. Hantec Markets is such a broker, and you can learn more here. Check out reviews of brokers too, but the most important thing is to know your money is safe and that you can get it back when you want to. And for that, you need to ensure you are with a regulated broker, regulated at the highest level possible.
The Dos and Don’ts of Forex Trading
1. Education is key
“An investment in knowledge pays the best interest.” – Benjamin Franklin.
Although we all have different skills and abilities that we are either born with or that we have developed in our youth, to be good at anything in life requires dedication and knowledge. Many individuals starting out on the trading path feel that they can just start trading after just reading a few articles and watching a couple of YouTube videos or having spoken with a trader friend about trading and got the “buzz”.
The reality is that although it is easy to open a trading account, deposit some funds and start trading without any decent knowledge, the likelihood is that you will lose money. Or, worse than that, you make money at first, possibly by fortune rather than good judgement, and you believe you have a “gift for trading”.
As with any endeavour, to succeed requires knowledge and wisdom (which is applied knowledge through practice. And that knowledge only comes through education. And not just from any source. As great as the interest is for information, there is as much misinformation or bad advice and teaching as there is good. So, try to ensure that you learn from a reputable source. Maybe even enrol on a paid trading education course, or check out the education sections offered by your broker.
The first thing to do is to gather enough information and have a good understanding of what trading is and how it might work for you. Then, you need to start to apply this knowledge, which brings us to our next “Do”, practice!
2. Practice makes perfect (they say)
“Great things come from hard work and perseverance. No Excuses.” – Kobe Bryant
Learning how to trade Forex is not a free ticket. It takes time and effort, but the more you work at it the better you will make your skills, with more practice, and that’s when wisdom comes into play too! There are no short-cuts here. The more time you put into first learning the skills of trading and then practicing and applying what has been learned will make a difference in whether you become profitable in the world of trading or not. Remember, there isn’t an easy way around practicing so don’t give up before even getting started! And with supervision, the application and practice of your knowledge is likely to have even better results. Which brings us to our final Do, get a role model or mentor
3. Get a mentor
“My dad was my best friend and greatest role model. He was an amazing dad, coach, mentor, soldier, husband, and friend.” – Tiger Woods.
If you are just starting out in the world of trading, it can be easy to feel isolated and unsure of yourself, and it’s important to not feel like you’re alone. You might find your self-confidence wavering and often wonder if whatever progress that has been made will last or whether this is all just temporary until something is all goes wrong next week!
The best way around these potentially negative feelings? Get feedback on where you stand right now – ask questions about your process, seek advice from other traders who’ve been there and done it, learn everything possible and get feedback from a mentor or role model, ask them about their experience or trade process.
If there are people out there you know or that you get to know, who are successful traders and have been where you are now before, then look for words of advice and encouragement when needed and take them up, because they’ll mean everything during this journey we call trading. Learn more about trading coaches here.
1. Don’t run before you can walk
“Well, I think we tried very hard not to be overconfident, because when you get overconfident, that’s when something snaps up and bites you.” – Neil Armstrong
You can’t expect to become a successful trader overnight. So don’t try and shortcut your way there through ever making deposits and trading big! Start out with an account size that is manageable, set your immediate objective for slowly and steadily increasing you balance through low risk, profitable trading. Avoid falling into the trap of trading big to try to play in the big league. This will unlikely mean a fast track to how quickly you earn money in the longer run. To achieve success in Forex markets it takes time and patience and controlling your emotions. Try not to let your ego get ahead of you, that is the way to losses.
There are many strategies that can be used to trade successfully, but whatever that strategy is, the best way for long term success is by starting with a small account and increasing it over time. It takes patience for sure, but this reduces the risks and makes failing less likely!
2. Don’t start trading without a plan
“If you fail to plan, you are planning to fail!” – Benjamin Franklin
You can’t be a successful trader if you don’t have the right mindset. It’s up to YOU which strategy will work best for YOUR personality and YOUR trading needs! There are many different approaches and strategies to choose from when it comes time for you to start trading Forex or any other markets. But the best way forward and to be effective is to find a plan or strategy that suits your own personality and that fits in with and can work around all your current life commitments.
You might be wondering how to get started in building a plan and strategy for trading. One of the best ways is by setting your goals for what you want to initially achieve from trading and then sticking with these rules.
One of your first goals to set will be do you just want to dip your toes in the water of the trading world, to make some “smile” money. Or are you aiming to make this into a full-time career and move to a place where trading is your primary income?
Decide what are your risk tolerances when trading, how much are you willing to invest in time, because time has a value, and in hard capital to make a success of trading?
So, what does a trading strategy or plan look like?
- What are you going to trade, which markets have you educated yourself about, which markets suits the time you have to dedicate to trading?
- What time frame are you going to trade. Are you going to sit at a desk and trade in and out of the market all day, as a day trader? Or are you going to analyse markets and look to take positions over several days or longer, trading the swings in the market? This is a swing or position trader.
- What defines you entering a trade, to buy or sell and at which level?
- What defines your trading size?
- What defines where you place your stop loss, and when and to where do you move that stop-loss?
- Where do you take profits on winning positions?
All these factors (and, in fact, more) need to be formulated into a trading strategy that you can then monitor, assess and refine. You can learn more here about building a successful trading strategy here.
3. Don’t overcomplicate things
“Life is really simple, but we insist on making it complicated.” – Confucius
Although we encourage you to educate yourself thoroughly, it is tempting when starting out trading to try to trade lots of different markets, using lots of different newly learned techniques, and apply lots of different strategies. However, there is a lot to be said for simplicity, and when first trading it is probably best to start with just one asset class, such as the Forex markets, and maybe just pick one or two different currency pairs to trade when you start out.
Learn some basics of technical analysis, get some understanding of the macroeconomic fundamentals, but do not make your trading strategy over complicated with lots of different signals and indicators when you first start out. Once you have a basic strategy that you are comfortable within place, you can then develop this and refine your process with new approaches.
9 quick tips for new Forex traders
A quick summary of what we have looked at here, our nine quick tips for new Forex traders:
- Don’t be overconfident
- Don’t rush in
- Chose the right broker
- Educate yourself
- Practice, lots
- Seek trustworthy advice
- Take your time
- Make a plan
- Keep it simple