I prefer to be an optimist but I'm sure you are already aware of the fact that 95% of people who attempt trading, extremely fail at it. Since the failure rate is so high I believe knowing what the pitfalls are is as important as knowing what the success factors are.
In this article, I want to arm you with information that most over-zealous newbies never bother to acquire until it's too late – after their accounts are blown. I want to help you avoid some of the most damaging blunders beginning traders make. Through this understanding, you will be in a much better position to catch yourself in the act of committing serious mistakes, and then take the necessary steps to correct them.
Here are some of the biggest mistakes you can make:
1. Ignoring the learning curve. Trading, like any other profession, has a learning curve. Some people take longer than others but I think it is a fair assumption that you should give yourself a good 1-2 years to learn what you need to before being able to earn a consistent income. Trading is one of the hardest professions out there to learn and experience is your best teacher. With every mistake you make you give yourself a little more knowledge if you allow yourself to learn from it. Respect and do not rush the curve. Spend time on demo accounts experimenting with everything you learn.
2. Expecting to make a boat load of money from the start. The nature of the currency market being what it is, it's understandable that a trader starts off with this expectation. Anyone can place a high-risk trade and make money. Those who do, are, I think, cursed from the start. They place risky trades that make them money and inadvertently convince them that trading is easy and then place even bigger trades later. Sometimes they lose it all because they had no concept of risk. It's almost better if a trader starts off losing his first trades because it quickly educates him that trading is risky stuff and must be done intelligently – by trading small at first. Trading in the beginning is all about survival. Start small and you'll likely survive the learning curve. Worry more about how much you can lose and less about what you can win … at least for now.
3. Overtrading. Too many people get into trading for the action and excitment of it. But the best traders have a little thing called patience in their back pocket. Placing trade after trade after trade just for the sake of placing trades will drown you in transaction costs and very likely many more losses that you would've had if you were selective. It's almost boring to watch a pro. They trade if and only if there is a high probability of the trade working. Sometimes it could be days between trades. Most would get bored, thinking: "hey, I'm a trader but I'm not trading. Be patient and trade only when your pre-established system tells you to! You do have a system do not you? If you can not describe precisely the conditions upon which you enter and exit winning or losing trades, then you do not have one!
4. Not having a system. Most new traders just jump in without any kind of defined methodology on which to make decisions. Hot tips and gut feelings is what they go on. They often do not understand why success is so elusive and tend to blame everyone but themselves. Time to step up to the plate !! Either devise a system yourself or buy one. Then back test it. If you are satisfied with it then demo trade it and see how you feel. More important than finding a system is finding a system that fits with you. There is no shortage of systems in this world so it's easy enough to find one. But too many traders do not stop to consider the implications of trading something that does not fit their personality. An engineer for example, is likely someone who is very calculated and exact in every pursuit. These types would very easily find their fit somewhere in the world of automated trading. To force any other kind of trading would be futile for this group because it would not be a natural fit.
"It's not whether you can be a good trader; it's whether you can find the trading that's good for you" (Brett Steenbarger, ENHANCING TRADER PERFORMANCE)
5. Undercapitalized. Folks, the only way trading is going to work out for you is if you have some money to trade with. The currency market is so flexible nowdays that you can start with as little as $ 200. But do not think that is what it means to be capitalized. Making good money in the market while being conservative requires a decent capital base.
6. Trading because you have to make money. Traders who are in it because of a desperate need to make money extremely end up losing the most. This pitfall is particularly dangerous because it leads a trader to make not one, but all of the previously mentioned mistakes. If you're broke and need money that badly, do not use trading as a saving grace. You will come out far worse than when you started!
I want to make one last thing perfectly clear. You will still make mistakes! You will still make some stupid trades and kick yourself after. Every successful trader, living or dead, has made mistakes. So, do not worry! In fact, most, if not all professionals got their start by blowing out a few accounts. So you should fully expect mistakes of yourself; they are a necessary evil. But you DO NOT have to blow out your account! Take the advice here seriously enough and you'll be able to stop yourself from doing too much damage, learn from the mistakes you do make and come out on top.