Trading is a very popular activity as many people can get access to various assets, from stocks and indices to forex and cryptocurrencies*. Trading allows you to make money if you are skilful, but it is not without risks.
Trading mistakes are part of every trader’s journey. Some mistakes are more costly than others, but ignoring a mistake and repeating it leads to failure in this area. In this FXOpen article, we will share some ideas on how to prevent common trading mistakes to improve your trading strategy.
Education and Research
There are many trading mistakes to avoid, and one of the most important is the lack of education and research. As a trader, you should always be open to continually learning and expanding your knowledge of the markets.
Continuous learning — experienced traders stay abreast of the latest market trends, news and analyses. They attend webinars and seminars and read books by experienced traders to expand their knowledge base.
Understanding the markets — every market is unique; therefore, traders learn about their mechanics, including their unique characteristics, volatility, volumes, and most common trends.
Fundamental and technical analysis — one more way to educate yourself is to conduct both fundamental (e.g. economic indicators, news events) and technical analyses (e.g. graphical patterns, trends) to make informed trading decisions. Following news and market updates will help you avoid making impulsive trades based on incomplete information.
A smart approach to risk management allows you to protect your capital. It’s important to understand your risk tolerance and set appropriate stop-loss orders to limit potential losses. In addition, it’s necessary to know what position size to choose so that you don’t risk a significant amount of your capital and don’t open too many trades simultaneously.
Risk tolerance — the theory states that you need to understand how much risk you are ready to accept and develop a risk management plan that meets your financial goals, that is, determine the maximum amount of capital you are willing to risk in a single trade.
Stop-loss orders — traders prepare themselves to exit a trade if its results do not meet their expectations rather than hoping for a reversal. Stop-loss levels based on technical analysis, support/resistance levels, or predetermined risk/reward ratios can help in limiting risks.
Position sizing — another way to limit risks is to calculate position sizes based on the percentage of risk per trade. History shows us that experienced traders avoid allocating too much capital to a single trade, as this increases vulnerability to significant losses. You may consider the following rules. The risk of the trade may not exceed 2-5% of the total amount of capital. The larger the capital, the lower the risk percentage should be kept.
Additionally, if you decide to use leverage through margin trading, don’t make it large until you have enough experience.
Fear, greed, and overconfidence may lead to impulsive decisions and poor judgement. Being calm and sticking to a trading plan, even when the market is volatile or unexpected events occur, is the best way to avoid mistakes. Here are ideas you may consider:
Trading plan — create a clearly defined trading plan, including entry and exit points and risk management. Stick to the plan and do not deviate from it under the influence of emotions.
Emotional control — emotions often lead to impulsive actions. Develop discipline, patience and self-control. Take breaks when you feel overwhelmed or over-excited, as this reduces stress and prevents burnout.
Regularly review and analyse — the market is not static; therefore, it’s impossible to develop a single plan and not change it at all. Analyse your trades objectively to identify patterns of success or failure.
Diversifying a portfolio across asset classes and industries helps traders reduce risk and protect against market volatility. For example, you can trade different currency pairs, indices, metals, commodities, and cryptocurrencies*. Tracking asset correlations and their performance may help you in building a strong portfolio.
Over-reliance on a single asset or market and market volatility increase risks. Diversification will help you avoid the pitfalls of chasing hot stocks or impulsive trades.
You can trade over 600 assets, including currency pairs, indices, stocks and crypto*, on our TickTrader platform with effective trading tools for your analysis. We are connected to major liquidity providers to offer high liquidity and spreads from 0.0 pips.
Before applying a strategy to real markets, experienced traders test it thoroughly on historical data. Additionally, they continuously refine their strategies depending on market conditions and results and avoid focusing on a single model. Markets have their own unique features, and therefore, it’s vital to build strategies considering them.
Also, you may need to adapt to changing market dynamics. Monitoring the market helps traders make decisions depending on the current situation.
Technology and Tools
Modern trading instruments allow traders to save a lot of effort and time. This can work out especially well for people who are involved in programming and are able to create tools for trading on their own. But even if you don’t know how to do that, there are various ready-made tools available for you. Let’s look at some of them.
Trading software — the use of modern trading platforms and tools allows you to conduct technical analyses, monitor market trends, and automate certain aspects of your trading strategy.
Demo trading — practising with virtual money using demo accounts offered by brokers will also help you try out new strategies and gain experience without risking real capital.
Automated trading — automated trading provides speed and efficiency, allowing for faster trade execution and timely response to market conditions. It eliminates emotional biases, ensuring that trades are based on predefined rules rather than impulsive decisions influenced by fear or greed. It enables backtesting and optimisation and can process large amounts of data and monitor multiple markets simultaneously, enabling traders to capitalise on opportunities that may otherwise be overlooked.
The mistakes discussed above may negatively affect your trading experience. Let’s sum up how a trader may overcome them:
- Continuous learning, conducting market research and technical/fundamental analyses
- Managing risk, setting stop-loss orders, and choosing position sizing
- Developing a clear trading plan and keeping emotions under control
- Diversifying your portfolio across several asset classes
- Defining and regularly reviewing trading strategies
- Using modern technologies and tools to automate trading
Not all trades will be profitable, and you have to accept that. Practice and research the market, and most importantly, read the news and analysis. Open an FXOpen account to start your trading journey today.
*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.