Five common mistakes that can happen when trading Forex

Written by: Dave Green • Tuesday, July 3, 2012 • 3 min read

• Last updated: Tuesday, July 3, 2012

Jack Collins, a friend of mine and one of the best Forex traders I have ever met, once told me that every trader, whether a big shot from Manhattan or a tiny fish from Portugal, will have awful days, and weeks, when the market just doesn't stop going against their strategies and positions. Jack's exact words were ” It feels like all markets are part of a huge conspiracy, up to a point I think to myself – maybe I’ve lost it…”

Well, a few years have passed since that talk, and I could honestly say that whilst true, making mistakes is never fun, on the other hand, even if you do make the occasional mistake, it is usually not a fatal one.

Here are five fatal mistakes that can turn one bad trading week into a demolition week that will ruin everything you have built for months, sweating like a pig:

1. Leverage higher than X100. I honestly think that times 25 is risky enough, to avoid some nerve-racking losses during bad periods. 25 leverage is also high enough to create some excellent gains on your happy days. Trading on high leverage is the #1 mistake.

2. Too many open positions on the same pair, simultaneously, in little pips, with differences between them. This method is actually quite popular with a lot of traders, and it is dangerous, especially during sensitive times, when markets are very noisy and unstable, when every news release rumbles the charts. Perhaps some fans will argue that this method can cause mucho dineros of profits, but I say that it is too risky for beginners, or for traders who don't want to take unnecessary extra risks.

3. This mistake is a bit similar in concept to the previous one: To open a lot of positions on currency pairs with high correlation between them. What does it mean? It means that you trade on pairs which behave more or less similar to each other. When one goes down, the other will also go down. Whoever says it is not the same pair is right, but they react in the same way on the chart. Take the Euro-Dollar and the Dollar-Swiss Franc for example. These pairs act with a strong opposite correlation. If one goes bullish, the other would almost certainly go bearish. Putting 2 Sell positions on the euro-dollar while at the same time opening two more Buy positions on the dollar-franc is almost the same as trading four identical positions. If everything goes well- bully for you, but if not- you are screwed.
Take a look at these two charts – 1 hour AUD/USD and 1 hour NZD/USD charts: They seem almost identical!
aud usd 1 hour chart 1 hour nzd usd chart

4. The fourth fatal mistake is to examine a one time-framed chart. Even if you are sure that you spotted a strong market trend, do yourselves a favor and take a look at longer term charts (longer than 15 minutes or 30 minute chart), to see how your theory sits on the big picture. Believe me, there are many cases in which while you are sure that you spotted a nice entry point, a second look at another time frame would make you think that you are witnessing a small correction, and not the trend that you wished for.
Take a look at this 15 min usd-cad chart:
usd cad 15 min chart
Seems like we are witnessing a strong, continuing downtrend, right? Well, guess again! Take a look at this 5 hours usd-cad chart:

5. The last mistake that I want to talk about is to trade with your emotions instead of your cold blooded, logical brain. People who trade with their emotions change their plans all the time. This is bad! Forex trading cannot involve your ego. Don’t try to beat the market no matter what, by waiting for your “soon to come” reversal. Think of the market as a big, long wave, and look for the best spots to ride it, not to fight it.

So my friends, these are my top tips on how to avoid those stinging howlers that bruise both our confidence and our bank accounts. I bet I haven’t covered everything here. Perhaps you have some top tips of your own… or better still, some good examples of when you’ve fallen for one of the 5 mistakes mentioned here? Don’t be shy. Please comment and let us know about some of your very own trading cock ups!