As a forex trader, you’re going to be making a lot of mistakes.
It’s just something you have to live with.
But whilst most mistakes aren’t that costly there are some which, if you make them, will really put a dent in your account and derail your career before it’s even started.
Here’s an overview of those mistakes.
Mistake #1 Leaving A Losing Trade Open
Of the three mistakes listed here, this is the worst.
It occurs because traders can’t accept they’re going to have a losing trade.
They think that by leaving their losing trade open the price will eventually reverse and move back in the direction initially expected, giving them a chance to escape their trade with a small loss or even a tiny profit.
Of course, 9 times out of 10 this doesn’t happen, and instead of moving back in the direction the trader expected the price keeps moving against him, increasing his loss and eventually causing him to lose all his money, blowing his account in the process.
The example above may sound a bit extreme, but I can assure you it is a very common mistake, especially with beginner traders.
Sadly, I can’t give any tips on how you can avoid leaving losing trades open other than to show you how dangerous it can potentially be if you do.
What I will say, is that if you do happen to get caught in a situation where you’ve got a losing trade open make sure you close it as soon as possible.
Don’t leave it open and wait for the price to move back in the direction you want, just close it and move on.
Mistake #2 Averaging Down
Leaving a losing trade open is bad, but there’s another mistake that’s makes it 10X worse……
Averaging down is a method people use to try to recoup the losses made by holding a losing trade open.
Instead of closing the trade and accepting the loss, people who average down decide to place more trades, the idea being that if the price moves back up the money made from the new trades will compensate for the money lost on the original trade they were holding open at a loss.
In theory, averaging down sounds like a good idea.
In practice, however, it’s a disaster.
The reason why is because the time when a trader decides to start placing more trades is almost never the time when the price is about to reverse.
This means that instead of the new trades recouping the losses from the first trade – the one being held open at a loss – they actually make it bigger, causing the trader to lose money at an even faster rate than what they were before.
I can’t stress enough how dangerous averaging down can be.
It seems like it could work and sometimes it does, but in the long run it will result in you blowing your account, so make sure you don’t do it.
Mistake#3 Revenge Trading
Revenge trading is what some people engage in after they lose several trades in a row or have a really big loss.
It’s caused by the strong emotional reaction people have to losing money.
People naturally don’t like losing money, so when they lose a large amount trading their first reaction is to do something to try to make it back.
Usually that means they start placing trades at a size much higher than what they usually trade at.
They place them at a higher size because it means the price doesn’t have to move as far for them to make back the money they’ve lost on their prior trades – thus they are able to make back the money they lost much quicker than they could if they’d just continued to place trades at the size they always use.
What makes revenge trading so deadly is that the trades traders place to make back their losses almost always wind up being a loser as well. This causes the trader to lose even more money, and only increases the need to revenge trade again, to make back the additional money now lost on the previous trade placed at a higher than normal size.
This cycle of placing trades at increasingly higher sizes can ultimately cause the trader to lose all the money in his account. Usually it doesn’t come to this, and the trader will stop trading before all the money is lost, though not before heavy losses have still been sustained.
Revenge trading isn’t something which affects everyone but if it does ever affect you the best thing to do is just stop whatever you’re doing and take the day off.
Don’t place anymore trades and don’t conduct any more analysis.
Just go and do something completely unrelated to trading.
Doing this you will erase the feelings of anger and frustration felt from losing money, allowing you to enter the next day with a fresh mind and a renewed sense of optimism.
Although it’s not possible to trade without making mistakes, by at least avoiding the 3 above you can keep yourself out of serious trouble.
If you want to learn more about some of the more mistakes you can make as a trader, check out my “6 Tips All Forex Traders Should Know”.