I’ve been in this industry for over a decade now and have been in a very fortunate position to learn a lot by watching others. I’ve seen the good, the bad and the ugly by watching tens of thousands of traders across various brokers.

Let me start off by saying that I am by no means perfect and I have (even recently) done quite a few of these myself. But knowledge is power, so I wanted to provide my observations of where things can start to go wrong, based on my own experience of sitting on the sidelines.  

1.      Ignoring Basic Risk Management aka Trading too big for their accounts

I have to start with risk because I believe it’s THE most important concept.

"Risk is what's left over when you think you've thought of everything"

Unfortunately, risk management is not sexy, however. It makes people fall asleep when you hear someone talk about risk management.

Risk can mean many things, but it’s especially prescient when it comes to Forex Trading due to the leverage that’s involved. Unfortunately, it’s a gift and a curse.

I always tell traders that leverage is like driving a fast car. It’s nice to know you’ve got that power if you want to use it. And most of the time you don’t want to (nor should you) drive 100km/h on a busy street.

That is how I best describe the use of too much leverage.

It’s great that you have the flexibility with it if you need it, but you shouldn’t be maxing out the margin on every trade. It gives you less flexibility if the trade goes against you and kills way too many traders too soon.

I’m not a big fan of martingale systems and have seen this ruin many traders; however, depending on the circumstance, I do enjoy averaging into a trade. After all, if I liked buying EURUSD at 1.1000, wouldn’t I also like it at 1.0960 where I’m getting a lower average entry?

Many forex education providers will advise you never to risk more than 1% on any trade, and this can be good advice, yet I’d say more than half of traders I’ve seen will routinely trade at least 10x that. Some will even come close to margin call triggers on the first trade. Frankly, this can just be like lighting money on fire.

It might not be as “fun” to trade when it’s so small. But if you’re getting too excited by it all, maybe you’re taking on too much risk.

2.       Too many trades/ Trading outside of the area of competence

A close cousin of too much risk is taking too many trades, or branching out into other areas.

There’s a reason that doctors specialise in one area. You’d probably be scared if you saw an eye doctor have a go at performing surgery on the brain.

Stick to just a handful of products at the time (I’d say a maximum of five, preferably three). If there is a correlation between them, that’s fine but don’t assume your knowledge of the yen will mean you’re a great trader of the Turkish Lira.

In most investment banks back in the day when they had large proprietary desks, traders would only stick to a few currency pairs. You’d be on the “yen” desk or the “sterling” desk. That makes much sense as there’s only so much information you can absorb.

If I see a client that is successful trading in currencies who then makes a jump to the Indices it often is a sure sign of trouble ahead.

3.      Getting caught up in FX Headlines/Mainstream Media

Many will disagree with me on this one, but following the same headlines as everyone else in forex trading can sometimes lead you astray.

Yes, you need to be informed about what’s going on. You shouldn’t stick in your head in the sand.

Howard Marks said it best when he remarked: “You can’t do the same things others do and expect to outperform”.

If you’re reading Bloomberg headlines saying so and so thinks EURUSD is heading to 1.10, then every man and his dog is reading the same thing. Ask yourself what do you know that isn’t already baked into the price? How can you have the edge over someone else? Is it really by consuming the same news like everyone else?

Being contrarian in life might make people think you’re strange, but in the financial markets, I find it invaluable. The markets are (mostly) efficient, and a lot of what you see is already factored into the price. You need to think differently to the market if you want to get ahead. Remember the GBP after Brexit? Analysts were calling for parity against the USD. You’d be crazy to buy it people said. Fast forward, and it was probably one of the best trades you could’ve made once the negativity died down.

4.      Not using a Demo

This is a pretty standard one, but if you’ve started trading without using a demo first then you’re asking for trouble.  

Do think you can be a pilot after a day of flying lessons? Then when you’re risking your money, you can't be expected to perform well in the markets without doing some practice first.

It takes a lot longer than people think to master their craft at trading and many mistakes on the way.

That being said, you can also spend far too much time on a demo and never understand the psychology of a real trader with real money and emotions on the line. So do practice, but just like when you learn to ride a bike, you will need to take the training wheels off at some point. That’s why we recommend having a demo and a live side by side (and Fusion offers unlimited demos for funded accounts)

5.      Moving Stops and Limits

Ah, the old “Greed and Fear” comment. Lots of people will talk to you about how two things kill a trader/investor, and that’s greed and fear.

Good trading is about good entries and exits.

Traders I’ve seen have spent much time setting up the perfect entry, but then they don’t have an exit plan.

The trades go well for them and then all of a sudden, the greed sets in. Suddenly, their take profit has been bumped up just a little bit higher to capture that extra drop of profit. Then boom! All of a sudden, the trade has reversed, and their profits have disappeared faster than you can say margin call.

Trading without stops and limits is also just as bad. You never know what “black swan” can happen while you’re away from your platform or are asleep. Having protection in the form of stops and limits can help minimise your risk. You can also try to use “trailing stops” which move up as the price moves in your direction. Ask me how if you need a hand with these.

6.      Ignoring the important of Psychology

You might’ve read my other posts about biases and psychology. But my personally believe that life is 80% psychology, 20% strategy and I believe trading is no different.

If you can master your trading psychology, you’ll be a far better trader for it.

This is everything from being too afraid to enter a trade, to being too greedy to close it to learning even more about all the biases we have and how to prevent them.

7.     Not having a strategy

Yes, I believe trading is 80% psychology. But you still need the 20% that comes from a strategy.  

What is your strategy? Why would (or should) that give you an edge? How long has the strategy been successful for? Is it technical or fundamental based?

You know the quote – if you to fail to plan, you plan to fail. You can’t show up and hope for the best. You’ll get killed. That’s where testing comes in whether that’s via a backtest of an algorithmic strategy or if it’s just applying the strategy on a demo. Or even just starting small with micro-lots.

You need a strategy if you’re going to succeed.

Sure you might get lucky for a little bit, but it won’t last forever.

Overall, this isn’t a definitive list and unfortunately, following it blindly is no guarantee for success in the markets.

We all make mistakes. I know I do – all the time. But I hope that the above is useful for you as I’ve had a window into watching traders for a long enough time.

Did I miss any? Was there something you thought was even more important? I’d love to hear from you.