2 Mistakes Forex Trading Newbies Usually Make

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

Insufficient 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!

  • Nazeem

    I am a noob that started looking at FX for the first time in my life February 2016. I found babypips March 2016.

    I am still in school and managed to work my way through to 11% in undergraduate.

    Beginning April I got a demo from FXCM and after 91 trades I managed not to blow the account and were down -2%.

    On 25 July 2016 I got a $50 live account from Oanda with the intention to work on the emotions. I grew the account by $10 (20%) in 1 week. I thought wow this is great and added another $200 to the account as it is very very very difficult to grow a $50 account. I now had $260 in the account and by 11 August 2016 I managed to shrink it to $216. I realised then what some of my mistakes were.

    Myfxbook shows the graph slowly going up from there with gain -1.31% and cash is at $219 after 133 transactions. It says 133 under myfxbook history which probably includes interest etc.

    With all trades I stick with the 1-2% risk rule meaning trading 500 units per trade with SL mostly 35pips (1.75USD) or less if I get a good entry point, but sometimes more and much more when trading JPY.
    I mostly do not trade majors and decided to just focus on these NZDUSD CADJPY AUDUSD EURAUD GBPJPY. It is hard to do that as I see many missed opportunities with other pairs, but the goal is to learn the behavior of these instruments. Yes a noob should look at 1 or 2 pairs, but I just can’t do it.

    My best trade was when trading NZDUSD where I gained about 200 hard earned pips. This is the part that also kills the noob. 200 pips at 5 cents a pip = $10. 1 Week or more to make $10 profit.

    But then again I should look at the pips gained and the percentage profit to feel better.

    There is always 2 things that keeps me motivated… maybe a little bit.
    In school it was mentioned that Forex trading is one of the most difficult things to do known to man. This makes me feel motivated as I have an almost good understanding of how this market actually works and after a few hundred trades I did not manage to blow accounts.

    Secondly, in that movie The Pursuit of Happyness, he says to his son “Don’t let anyone tell you that you cannot do something, just because they can’t do it”.

    So yes it is possible to trade with a small account and be profitable, but to make money from it is very very very hard.

    I have and are putting in the hard work and my goal is to be a constantly profitable trader. I think I am on the right track.

    What do you think? Any more tips?

  • Nazeem

    Hi. I just saw your message as I were waiting for a response on your blog and did not realize it will be on disqus until I saw the notification.

    In any event it is shocking that I do not have a trading journal, but more shockingly I do not have a trading plan noted down. At this stage it is all in my head and constantly evolving. My initial excuse for not having a trading plan noted down, was that I did not learn enough about it in school and never found samples etc. to what how to go about it.

    I think the time is near where I will note down my thoughts. The other issue which also caused a holdup, is that I cannot grasp the concept of myself being able to follow a trading plan to the tee. Reason being that the market always changes and one can never be 100% sure of what Mr Money will do. My thoughts change with the market.

    But I do not just jump in. Each trade is carefully planned in like “Plan your trade & Trade your plan”. It made sense to me that this is a trading plan and not having a plan which one religiously follows every day. I understand the concept of doing the same thing every day may lead to long term consistent profitability. Yes I know, some or most forex robots are profitable, but perhaps the human mind can do much more as they (Mr Money) knows what we are thinking, what we are going to do and when we are going to do it.

    Yes the trading journal. It is important yes. I had a look at meetpips, but it did not really work for me. I then added a comment to made trades on myfxbook, but then stopped for some reason. Now I am just adding notes to my charts.

    I will get there. I mean the point where I follow the default or standard trading procedure. But it is of concern that what if I do what most or all FX traders do. Will I be part of that 90% majority?

    • Dr. Pipslow

      Unfortunately, neither of us can answer the question until you either blow your account or start trading profitably.

      Don’t sweat the trading journal part. Remember that at the end of the day it’s about you and your own journey.

      You don’t have to follow popular formats like MeetPips and myfxbook. You can make your own spreadsheet and determine for yourself what helps and what doesn’t. The important bit is that you have something that you can look at and constantly remind you of what you’ve done and what you should do next.

      • Nazeem

        Thanks for the tips.