Common Bad Habits Of A Forex Retail Trader.
Why is it so easy to get into bad habits?
Forex trading is a complex business and with so many pitfalls a trader can get lost in what approach to take. We as traders all want to be successful and make lots of money but the bad habits many new traders adopt tend to be as a result of pressure put on themselves to trade and be successful. Being patient and crafting the skills required for a Forex trader to be profitable, is a time consuming process. Unfortunately, we only need one bad habit to hinder this progress.
This article will go through the most common mistakes made by traders and will hopefully help you recognise and eradicate them from your trading.
Most common bad habits
- Trading from the wrong areas and chasing the markets, by this I mean not looking at the charts for trades at the right areas. We need to trade from areas where price has shown strong rejections in the past. I see a lot of traders entering trades from weak levels in “NO MANS LAND” if you like and then they wonder why price has not made a strong move. Where we look for trades is the most important aspect of any traders makeup. Chasing the markets is another big mistake, it’s far better to hold back and wait for price to come to you and look for trades where you want them to from.
- Not using stop losses, if a trader cannot see that using stop losses to protect themselves is important then they should really reconsider their approach. Stop losses are such a valuable tool we cannot afford to ignore them. They help us to define our risk for each trade and provide us with a safety net if the trade goes against us. Trading without stop losses is a risk no trader should take!!
- Watching live trades too closely, if this is something you find you are guilty of and know it is a problem. The simplest way to solve it, is to turn off the chart you have a live trade on – it’s that simple!!! Watching every pip movement will drive you crazy and just cause you to over think the trade. A trade plan written before entering any trade will stop trades being messed about with and over thought. When money goes on the line decision making can be difficult, resulting in mistakes being made.
- Overexposure, a basic example of overexposure would be if a trader opened a short trade on the EUR/USD and at the same time a long trade on the USD/CHF, as they are inversely correlated the chances are if one falls the other will rise and vice versa. Thus, resulting in doubling up the risk, which we really don’t want to do. So understanding how to prevent overexposure is very simple once you know which pairs are correlated and which are not.
- Using indicators, we’ve all been there and fallen for the notion that indicators can help us analyse the markets better, but from my own experience it’s not the best path to take. Learning to read price action is more than enough to trade the markets correctly. Yes, it takes time to understand price action but slowly the story becomes much clearer. Indicators can be powerful tools when in the correct markets but they can also hinder our analysis and produce many false signals, plus they allow the blame of poor trading results to be transferred onto the indicator even though it’s your money that’s been lost and you who put the trades on.
- Using lower timeframes, the temptation to drop down to say the 5 minute charts is very common and plays into the forex markets hands. If you can’t make money on the daily timeframe, trying to profit on a lower timeframe will be a fruitless journey. Traders should always start their trading journey on the higher timeframes and only once mastered should they consider dropping down to lower timeframes.
- No rules, rules are the glue that keeps traders consistent and being disciplined enough to follow your rules will put you in a far stronger position. Traders who wing it, may well hit a good run but sooner or later that run will end and this is where the rules set in place will help guide you when things are not so positive.
- Trading with emotion, the emotional aspect of trading is a very hard area to master. We’d all love to have winning trades all the time but this simply is never going to be the case and dealing with the losing trades can throw up all kinds of doubts for a trader. Understanding that the markets have no interest in your feelings and don’t cause trades to fail out of spite, enables a trader to realise that trading is just about taking high probability trades that have a higher chance of working out. No trade can be seen as a certainty and every trade has the potential to fail.
- Expectations set too high, trading is presented in such a way that new traders to the business expect to be “living the life” within a few months. They soon find out the reality though and this explains the high rate of traders who vanish after killing their first live account. We will all trade slightly differently, even if we try to copy a successful trader. The key is to learn how to use our own personality in a positive way to put our own stamp on the style of trading we use.
- Trading what you think not what you can see, as technical traders learning to rely on the charts and not what we think may happen is paramount. The charts will provide enough information to make an accurate trading decision. Mixing the two will only cause confusion and result in reducing the ability of a trader to pull the trigger to enter a trade when they should.
- No trading routine, a trader should always have in a place a trading routine. If a trader comes to check their charts for setups on a random basis it will not produce consistent results. Being in this business is all about getting every aspect of your trading consistent and disciplined, from the types of trades you take, to how you manage each trade, etc….. The routine is designed to make sure you are in the correct mind set when you come to assess the charts for analysis.
- Going live too soon, the Forex offers the ability for any trader to practise trading on demo accounts. These demo accounts are the best way to find out what works and what doesn’t. Only open a live account once you can make profits consistently on demo. Holding back and being patient enough before going live is an indication a trader means business and is allowing themselves to learn at the correct pace.
Correct any weaknesses
From the points above you should be able to recognise that discipline, rules and patience are very important factors and tends to help us distinguish between the consistent traders and the struggling traders. A well drilled consistent trader will know exactly where to look for trades, how to enter and exit a trade and understand the risks involved when trading. They will be clinical and not allow the market to effect there emotional state.
A struggling trader on the other hand, will find themselves on an emotional roller coaster moving from emotional highs to lows. They will constantly be questioning each decision they make and find the whole process of trading a stressful and time consuming task, probably spending too much time at the charts, watching trades.
Many traders may well be unaware they possess any of these bad habits but the first step to begin resolving any issues is to be able to recognise they exist. This business has the ability to expose any weaknesses we possess and relay it back into our trading results. If you are not getting the results you think you deserve, then maybe you fall foul of one of these issues.
Put simply, if traders ignore the fact they may have any bad habits they will never be able to reach their full potential and thus the ability to self-analyse ourselves is a very important trait in developing into better traders.