2 Most Dangerous Mistakes Forex Newbies Make

Updated from its original posting on 17-01-2010

Starting out in the forex market is definitely an exciting experience but you must be very careful not to make these dangerous mistakes that most beginners make.

1. Undercapitalization

forex losingInsufficient initial capital is the first mistake by beginners, and it usually ends up killing them.

I’ve seen traders, including myself, blow their whole trading account during the first month or week. I blew one of my accounts in thirty minutes!

The trading capital is lost even before you have the time to properly learn to trade.

This is what usually happens to a new traders:

  • They don’t have sufficient trading knowledge and experience.
  • They are not familiar with risk control and money management principles.
  • They partially realize risks that they will have to deal with when trading but aren’t always capable of precisely formulating and evaluating them. Therefore, they often undertake incorrect actions for lowering them.

Common sense leads you to believe that the best way to initially lower risk of potential losses is to trade the smallest amount possible. Then as your experience and skills grow, you steadily increase your trade size. I think this approach is hogwash.

Noobs trying to trade with with single lots with tight stop losses to keep risk small while trying to gain trading experience, in order to trade bigger lots with bigger stop losses is dumb.

You have to understand that a small trading account actually increases the risk of losses. By starting with a puny bankroll, it’s impossible to lower risk. This is because as your account shrinks, losses take a bigger chunk.

By using short and tight stops, you increase your chances that the stops will be triggered more frequently and your total loss will consist of many small losses.

Your trading account should be as large as possible in order to correspond with market conditions and provide the necessary flexibility in making trade decisions.

The size of your trading account is another tool in your trading quiver.

Like any business, you have to make sure you adequately funded. Don’t try to lower risk by only depositing a portion of your available trading capital.

Fund yourself right but use proper money and risk management!

2. Overtrading

Overtrading is when you (hoping to receive the maximum possible profit) open a huge position consisting of multiple lots. Considering the typical market activity, it’s easy to lose half or even all your trading capital with this.

This problem is sometimes directly connected to insufficient trading capital.

But it’s more likely due to the trader lacking knowledge of money management principles, which means lack of competence to control their trading capital properly.

Your trading capital is used to earn money. You should treat each dollar is like a newborn baby.

Your first and foremost responsibility is to protect it. If you lose it, you have less to help you earn money.

Have you ever made any of these mistakes? Please share your experience in the comments below. I’m sure we’d all be interested in possibly learning from each other. I know I would!

  • Tainan Lucas

    I did it! It probably happens to all of us beginners with lack of experience and knowledge. It’s like somewhere in life, you got to be slapped to learn, then you start having conscience of what you are doing.
    I got my lesson…

    • Dr. Pipslow

      Good for you! Yep some lessons take the hard way to learn but sometimes that’s what makes those easier to remember.

  • Le Hai

    Dear Dr. Pipslow, as a newbie in this FX trading. I have made both of the mistakes that you mentioned above. I would like to seek your suggestion on the amount of capital if it is not too much of a problem. Since, I am an unemployed graduate with little income, I can only afford $50 for the initial real account practice (which I have just burned 1 week ago). Going back to demo now cause I know I am not ready yet in both knowledge and emotion aspects. But for the future $500 will be enough?

    • Ahmer Khan

      Professional Traders do not use leverage. There is a myth that you can double your account every month which is not true. An average professional traders monthly gain 3% to 5% of their account.

      If you want to trade like professionals then trade these lots.

      $1000 = lot 0.01 micro lot
      $10000 = lot 0.1 mini lot
      $100000 = lot 1.00 standard lot

      • Le Hai

        Thank you for your insights. I will do more researches to manage well my risks and money growth. Unfortunately, my broker implements 1:100 leverage for every employees and trainees. Hence, as a young student, I am willing to learn and adapt with the market requirement.

        • Ahmer Khan

          Low leverage is good for trading, Even 1:100 is very high.

    • Dr. Pipslow

      Yikes, it really does sound like you should be practicing with a demo account first before putting real money on the line. You should only trade an amount that you can afford to lose, given all the risks associated with forex trading.

      • Le Hai

        Yes, I have been trading for 6 months and attend a broker’s training program. I was too confident that I know all the basics since I managed to double my demo deposit within 2 weeks. But I did not realize that real account trading is a different level. I am currently reading your website materials for more knowledge.

  • marvin

    im guilty of number 2

    • Dr. Pipslow

      It does take time and discipline to overcome #2. Just be patient!

    • Dominnik

      i am guilty for both ,i hope i can gain more valuable experience from mistake,thank you very much for the article ,

      • marvin

        and to add to that i just blow up my 10K usd equity.
        now am back to demo account.

  • Lectura Mutai

    I got a 1000 account on a 0.1 trading account.. how many position do i need to open per day because I see someone has said it goes well with 0.01? I am also a beginner..

    • Dr. Pipslow

      Well it really depends on your risk preferences and trading style. How much is the total risk are you comfortable with? You can set that daily limit then base the number of positions open from there.

      • Lectura Mutai

        Actually my target is to make 30 – 50dollars a day for now till I get the concept fully

  • Dr. Pipslow

    Ouch! Hope you’re doing much better with your trading performance now!

  • Willz

    Also guilty of #2. I overtraded on EURUSD which was compounded by flight MH17 being shot down and wiped out £3000. It also learnt that it’s best to take the loss and end your trade if it goes the wrong way after a major global event. The positive outcome is that the incident really made me aware of overtrading and I’ve adapted my strategy accordingly.