Two Most Dangerous Mistakes Made by Forex Noobs

I want to discuss the two most dangerous mistakes made by noob traders:

  1. Undercapitalization
  2. Overtrading

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!

Overtrading

Most new traders overtrade.

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.

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!

  • daniel atajan

    i love this message it has opened up my eyes to some common mistakes iam fond of meanwhile thanks a million.

  • ReverendPip

    First of all a new trader, should not be trading a live account until that have develop a trading strategy that had clear cut rules that have yielded successful results. If you cant grow a demo account you will not be able to grow a live account.

    As far as being under capitalizes. That can be up for debate. As far as I see it, your working capital (Equity) should be determined by you trading strategy. Again all of this should have been worked out before trading your live account. Along with over trading.

    So I say the biggest mistakes of noobs is trading a live account without taking the time to gain the proper knowledge that needs to be gained as the trade a demo account.

  • Buckscoder

    Well said! I am a newbie to forex, but have a
    sharp investment background in shares and
    commodities.

    I am new to forex, but not to coding. So I wrote
    some EAs and ALL of them show me one thing:

    If I set the maximal risk with tight SLs in the
    range

  • Buckscoder

    less than 100 pips it produces loss, not profit.

  • nev

    I think every retail trader has made these mistakes and no less than a multitude of times lol. Although I disagree with the problem of under capitalisation – it’s more over-sizing entries if anything. On a side note leverage isn’t the problem either; the more the better since it saves margin on a small account. The problem is using unrealistic entry sizes and abusing leverage to allow them. Really can’t see the problem with a 200 dollar account if you’re trading 100 dollar sized entries (0.001 nanolots), a 1-2% trade then allows for a stop loss of 200-400 pips. For scalpers using micro 1k lots (0.01), a reasonable risked entry would allow for a 40-50 pip stop. That’s assuming the trader has the discipline to stick to these money management rules in the first place (and assuming the trader is content with the gains for the purpose of the learning exercise, not trying to use it to pay the rent, feed the family or his girlfriend).

    Well earlier in my laughable ~12 months’ experience I know I’ve managed to relapse to over sizing my positions on at least 3 or 4 trading sessions each time doing my account in at least 30-40% with the intention of breaking the rules ‘just once’ to break even/make more profit. The trades included a ‘hedging’ strategy that frequently escalated to ridiculously large strangles sometimes 200 pips apart (took a few micro-accounts to convince myself stop losses were a better idea), following trade signals off random sites and ironically enough the last and hopefully final time it happened was just after a 1k deposit to avoid being under-capitalised & to trade larger lots – too bad 1k doesn’t let you get away with lots THAT large (~50k). Evidently the confidence gain from an equity deposit can be a little *too* heartening lol.

    I guess it’s that potential to double your deposit that makes a fresh trader throw away all the rules (fairly sure that’s what I was thinking anyway)

    To add to that I have (and still occasionally slip to) use those overzealous stop-losses and at worse continue to move them away even though price has invalidated the trade signal anyway.

    An additional mistake I figured is worth pointing out is overtrading in terms of time – spending 14 hours a day watching the chart and repeatedly entering 13 hours a day, for whatever reason (validation of the time spent, being desperate to break even from a loss, being desperate to convince people you’re actually making money and not just sitting in front of a computer 14 hours a day etc). Found that if one is employing a scalping (suicidal) strategy the losses are going to REALLY rack up since a scalping system by default would allow for relatively more frequent entries than a medium term sort of system; increasingly poor judgement and resultant susceptibility to enter on sub-optimal trade setups/signals combined with a system that aims to recognise and take frequent trade setups/signals in the fist place is a sure recipe for disaster and man have I tasted it.

  • cubanpip2010

    the problem with a 200 dollar account even if you’re trading nanolots(0.001) or microlots (0.01) is just mental. the profit that you do in fact don’t show it’s value to your mind because you are not looking that you are in a 100 pips profit trade. you concentrate in “only 1 dollar” or “only 10 dollars” and you want more. Thanks for the post.

  • ReverendPip

    First of all a new trader, should not be trading a live account until that have develop a trading strategy that had clear cut rules that have yielded successful results. If you cant grow a demo account you will not be able to grow a live account.

    As far as being under capitalizes. That can be up for debate. As far as I see it, your working capital (Equity) should be determined by you trading strategy. Again all of this should have been worked out before trading your live account. Along with over trading.

    So I say the biggest mistakes of noobs is trading a live account without taking the time to gain the proper knowledge that needs to be gained as the trade a demo account.

  • Buckscoder

    Well said! I am a newbie to forex, but have a
    sharp investment background in shares and
    commodities.

    I am new to forex, but not to coding. So I wrote
    some EAs and ALL of them show me one thing:

    If I set the maximal risk with tight SLs in the
    range
    is real. If I have luck, it might work for a
    couple of weeks, but a backtest over 2 years let
    the account then run to zero.

    Those checks tell me one thing: Trades need some
    space to “breathe”. To set a SL 150 pips below when long, it doesnt mean it will hit. The funny thing with those markets is: If I set the SL not too tight, it doesn’t get hit. If it’s too tight, the chance to get hit is much higher.

    In conclusion: Never ever start with a too small acount. You might think if you risk only 10 pips per trade you have reduced risk and can enter 100 trades until the account is zero. But it is very likely that ALL of your trades hit that SL and you have no profit at all. So, in a mini account this would burn 1000 dollars for sure.

    In opposition, with a SL 200 pips away you might win 3 trades out of 5 and if proper mm comes in that lead to profits.

    Just my opinion. Successful trading yall!

  • Buckscoder

    less than 100 pips it produces loss, not profit.

  • nev

    I think every retail trader has made these mistakes and no less than a multitude of times lol. Although I disagree with the problem of under capitalisation – it’s more over-sizing entries if anything. On a side note leverage isn’t the problem either; the more the better since it saves margin on a small account. The problem is using unrealistic entry sizes and abusing leverage to allow them. Really can’t see the problem with a 200 dollar account if you’re trading 100 dollar sized entries (0.001 nanolots), a 1-2% trade then allows for a stop loss of 200-400 pips. For scalpers using micro 1k lots (0.01), a reasonable risked entry would allow for a 40-50 pip stop. That’s assuming the trader has the discipline to stick to these money management rules in the first place (and assuming the trader is content with the gains for the purpose of the learning exercise, not trying to use it to pay the rent, feed the family or his girlfriend).

    Well earlier in my laughable ~12 months’ experience I know I’ve managed to relapse to over sizing my positions on at least 3 or 4 trading sessions each time doing my account in at least 30-40% with the intention of breaking the rules ‘just once’ to break even/make more profit. The trades included a ‘hedging’ strategy that frequently escalated to ridiculously large strangles sometimes 200 pips apart (took a few micro-accounts to convince myself stop losses were a better idea), following trade signals off random sites and ironically enough the last and hopefully final time it happened was just after a 1k deposit to avoid being under-capitalised & to trade larger lots – too bad 1k doesn’t let you get away with lots THAT large (~50k). Evidently the confidence gain from an equity deposit can be a little *too* heartening lol.

    I guess it’s that potential to double your deposit that makes a fresh trader throw away all the rules (fairly sure that’s what I was thinking anyway)

    To add to that I have (and still occasionally slip to) use those overzealous stop-losses and at worse continue to move them away even though price has invalidated the trade signal anyway.

    An additional mistake I figured is worth pointing out is overtrading in terms of time – spending 14 hours a day watching the chart and repeatedly entering 13 hours a day, for whatever reason (validation of the time spent, being desperate to break even from a loss, being desperate to convince people you’re actually making money and not just sitting in front of a computer 14 hours a day etc). Found that if one is employing a scalping (suicidal) strategy the losses are going to REALLY rack up since a scalping system by default would allow for relatively more frequent entries than a medium term sort of system; increasingly poor judgement and resultant susceptibility to enter on sub-optimal trade setups/signals combined with a system that aims to recognise and take frequent trade setups/signals in the fist place is a sure recipe for disaster and man have I tasted it.

  • cubanpip2010

    the problem with a 200 dollar account even if you’re trading nanolots(0.001) or microlots (0.01) is just mental. the profit that you do in fact don’t show it’s value to your mind because you are not looking that you are in a 100 pips profit trade. you concentrate in “only 1 dollar” or “only 10 dollars” and you want more. Thanks for the post.

  • tonyro44

    Each and everyone had a great input which is worth keeping in mine. Thankyou

  • PipCounterz

    I completely agree. I have a degree in economics, a post-grad degree in accounting and have been investing in property and shares for the last 10 years. Most of that has hindered rather than helped me in developing my trading personality.

    Money Management is something you need to learn by experience rather than reading and that is why the trial accounts are so worthwhile. I made sure that I could preserve my capital for at least 4 weeks (trading every day) before I even applied for the live account.

    Make your trading mistakes on the demo account and it will save you a lot of pain when you go live. Also don’t think that you couldn’t make a simple mistake liking pressing the buy button instead of the sell because in the heat of the moment we all make dumb mistakes that can cost us – let the cost be demo money!!

    Thanks for all of your comments I read them everytime you post.

  • tonyro44

    Each and everyone had a great input which is worth keeping in mine. Thankyou

  • PipCounterz

    I completely agree. I have a degree in economics, a post-grad degree in accounting and have been investing in property and shares for the last 10 years. Most of that has hindered rather than helped me in developing my trading personality.

    Money Management is something you need to learn by experience rather than reading and that is why the trial accounts are so worthwhile. I made sure that I could preserve my capital for at least 4 weeks (trading every day) before I even applied for the live account.

    Make your trading mistakes on the demo account and it will save you a lot of pain when you go live. Also don’t think that you couldn’t make a simple mistake liking pressing the buy button instead of the sell because in the heat of the moment we all make dumb mistakes that can cost us – let the cost be demo money!!

    Thanks for all of your comments I read them everytime you post.

  • iwogar

    I think undercapitalization is relative since certain brokers allow you trade with any amount.

    In as much as I agree with trading demo acounts first, nothing replaces the emotions associated with tading live accounts. In the heat of battle most new traders throw their plans out the window.

    The sad part, most will only learn the hard way, like myself :-)

  • olubajia

    well i must say am an intraday trader, and i actually started trading with as little as $100 just to have a feel of the market. seriously, trading with lots of 0.1 on a $100 account is like risking half if not all your capital, from my experience,
    $100 = 0.01-0.03 lot size
    $200 = 0.03-0.05 lot size
    $300 = 0.05-0.08 lot size
    $500 = 0.1 – 0.5 lot size
    and finally$1000 = 0.8 – 1 lot size

    above is a proper risk management for different sizes of accounts. And on the issue of over trading, i’ve also noticed that teu, wed and thur are the best days to trade and if u have a drwadown on any particular day, stop trade and wait for the next day.

  • iwogar

    I think undercapitalization is relative since certain brokers allow you trade with any amount.

    In as much as I agree with trading demo acounts first, nothing replaces the emotions associated with tading live accounts. In the heat of battle most new traders throw their plans out the window.

    The sad part, most will only learn the hard way, like myself :-)

  • olubajia

    well i must say am an intraday trader, and i actually started trading with as little as $100 just to have a feel of the market. seriously, trading with lots of 0.1 on a $100 account is like risking half if not all your capital, from my experience,
    $100 = 0.01-0.03 lot size
    $200 = 0.03-0.05 lot size
    $300 = 0.05-0.08 lot size
    $500 = 0.1 – 0.5 lot size
    and finally$1000 = 0.8 – 1 lot size

    above is a proper risk management for different sizes of accounts. And on the issue of over trading, i’ve also noticed that teu, wed and thur are the best days to trade and if u have a drwadown on any particular day, stop trade and wait for the next day.

  • cfxland

    Truth, it all has to do with the general objective a trader comes to the market with. If you want to make 50pips daily with a capital of $500, its fine till your SL(tight) gets hit twice and you are left with $450( asumming a 25pip SL). Haha, your emotions starts playing tricks on you,fear, impiared judgement, irrational trades, hell it gets hard to even take profit when they come, the market moves back again and you close the trade, more losses. This sounds like my story.
    It’s true what undercapitalization does to an inexperience trader,it distorts you when you are losing and you overtrade hoping to breakeven till you go red.
    In the end with a tested system, one can safely trade 0.1 lot for every $1000 in your account, that’s 1/1000th of your account/Equity. this way i believe is less greedy(we all are) and if you loose your equity then you better check the system or your implementation of it. Cheers

  • cfxland

    Truth, it all has to do with the general objective a trader comes to the market with. If you want to make 50pips daily with a capital of $500, its fine till your SL(tight) gets hit twice and you are left with $450( asumming a 25pip SL). Haha, your emotions starts playing tricks on you,fear, impiared judgement, irrational trades, hell it gets hard to even take profit when they come, the market moves back again and you close the trade, more losses. This sounds like my story.
    It’s true what undercapitalization does to an inexperience trader,it distorts you when you are losing and you overtrade hoping to breakeven till you go red.
    In the end with a tested system, one can safely trade 0.1 lot for every $1000 in your account, that’s 1/1000th of your account/Equity. this way i believe is less greedy(we all are) and if you loose your equity then you better check the system or your implementation of it. Cheers

  • LarryLivingston

    As for account size, what exactly is a good amount of starting capital for a beginner trader? I’ve found that with stocks the minimum amount a trader can start with to have any meaningful trading is around 20k or more. With less you are forced to risk toomuch. You set a tight stop, you get hit with slippage and a commission and your finished. Its almost impossible to have sensible money management rules like the 2% rule.

  • LarryLivingston

    As for account size, what exactly is a good amount of starting capital for a beginner trader? I’ve found that with stocks the minimum amount a trader can start with to have any meaningful trading is around 20k or more. With less you are forced to risk toomuch. You set a tight stop, you get hit with slippage and a commission and your finished. Its almost impossible to have sensible money management rules like the 2% rule.

  • daxter22

    I would say for forex you need a few thousand to make it worthwhile. I personally spread bet my forex for the tax advantages and for most pairs the minimum point per pip is 50pence. With an account of £3-4,000 you can get into trades risking only 1-2% of your account with £1-£2 per pip trades and so when you hit your 100pip moves you pocket a few hundred pounds. I agree that with smaller accounts, you take bigger risks as its the profit per trade people sweat on (rather than patting themselves on the back for evaluating a set-up correctly and pulling in some decent pips).

    Believe me, once you place or grow your account to £40-50,000 you really do your homework because by that stage (still only risking 1-2% per trade) when you get it wrong you take bigger hits which are harder to stomach

  • daxter22

    I would say for forex you need a few thousand to make it worthwhile. I personally spread bet my forex for the tax advantages and for most pairs the minimum point per pip is 50pence. With an account of £3-4,000 you can get into trades risking only 1-2% of your account with £1-£2 per pip trades and so when you hit your 100pip moves you pocket a few hundred pounds. I agree that with smaller accounts, you take bigger risks as its the profit per trade people sweat on (rather than patting themselves on the back for evaluating a set-up correctly and pulling in some decent pips).

    Believe me, once you place or grow your account to £40-50,000 you really do your homework because by that stage (still only risking 1-2% per trade) when you get it wrong you take bigger hits which are harder to stomach

  • drpipslow

    Excellent comments from everyone! Thank you for your contributions! :)

  • drpipslow

    Excellent comments from everyone! Thank you for your contributions! :)

  • almalik77

    risk management made easy.10000 trading account leverage 200 to one 50.00 per lot equals 1.00 a point.the market would have to move 9950 points against your position to get a margin call.pull up a 15 yr chart and see when the last time one currency rose 9950 points up or down in one day or even 6 months to another. calculate the probabilty.i gaurantee you the probabilty of that is so low the risk almost nothing on any trade you take.of course this for long term traders not the get rich quick seekers.

  • almalik77

    risk management made easy.10000 trading account leverage 200 to one 50.00 per lot equals 1.00 a point.the market would have to move 9950 points against your position to get a margin call.pull up a 15 yr chart and see when the last time one currency rose 9950 points up or down in one day or even 6 months to another. calculate the probabilty.i gaurantee you the probabilty of that is so low the risk almost nothing on any trade you take.of course this for long term traders not the get rich quick seekers.