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.
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 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!