What Are the Major Mistakes Forex Traders Make?
Most forex traders associate a trading mistake to the outcome (in terms of money) of any given trade. The truth is sometimes, mistakes have nothing to do with it. Mistakes are made when certain guidelines are not followed. When the rules you trade by are violated.
Example 1: The system signals a trade.
1.
Signal taken and trade turns out to be a profitable trade. Outcome of the trade: Positive, made money. Experience gained: It is good to follow the system, if I do this consistently the odds will turn in my favor. Confidence is gained in both the trader and the system. Mistake made: None.
2.
Signal taken and trade turns out to be a losing trade. Outcome of the trade: Negative, lost money. Experience gained: It is impossible to win every single trade, a losing trade is just part of the business; our raw material, we know we can’t get them all right. Even with this lost trade, the trader is proud about himself for following the system. Confidence in the trader is gained. Mistake made: None.
3.
Signal not taken and trade turns out to be a profitable trade. Outcome of the trade: Neutral. Experience gained: Frustration, the trader always seems to get in trades that turned out to be losing trades and let the profitable trades go away. Confidence is lost in the trader self. Mistake made: Not taking a trade when the system signaled it.
4.
Signal not taken and trade turns out to be a losing trade. Outcome of the trade: Neutral. Experience gained: The trader will start to think “hey, I’m better than my system”. Even if the trader doesn’t think on it consciously, the trader will rationalize on every signal given by the system because deep in his or her mind, his or her “feeling” is more intelligent than the system itself. From this point on, the trader will try to outguess the system. This mistake has catastrophic effects on our confidence to the system. The confidence on the trader turns into overconfidence.
Example 2: System does not signal a trade.
1.
No trade is taken Outcome of the trade: Neutral Experience gained: Good discipline, we only need to take trades when the odds are in our favor, just when the system signals it. Confidence gained in both the trader self and the system. Mistake made: None
2.
A trade is taken, turns out to be a profitable trade. Outcome of the trade: Positive, made money. Experience gained: This mistake has the most catastrophic effects in the trader self, the system and most importantly in the trader’s trading career. You will start to think you need no system, you know better from them all. From this point on, you will start to trade based on what you think. Confidence in the system is totally lost. Confidence in the trader self turns into overconfidence. Mistake made: Take a trade when there was no signal from the system.
3.
A trade is taken, turned out to be a losing trade. Outcome of the trade: negative, lost money. Experience gained: The trader will rethink his strategy. The next time, the trader will think it twice before getting in a trade when the system does not signal it. The trader will go “Ok, it is better to get in the market when my system signals it, only those trade have a higher probability of success”. Confidence is gained in the system. Mistake made: Take a trade when there was no signal from the system.
These are common mistakes. Avoid them like the plague.
