10 Bad Habits to Avoid in Forex Trading

Beginner and experienced traders alike learn a small but significant truth the hard way: Forex Trading is a complex activity that presents rich opportunities for profit but, at the same time, hides many pitfalls. This complexity manifests itself in many ways. Among these is the tendency, which is entirely natural in the absence of specific training and awareness on the part of investors, to adopt negative habits. Some of these may seem healthy, or at least harmless, upon superficial analysis, but they can lead traders to disaster or seriously compromise their careers, just like other habits. In the following article, we list and describe some of the most common and dangerous habits to avoid in Forex Trading.

Creating Unrealistic Expectations

This is the classic mistake of beginners, and it stems from an unhealthy, or at least inaccurate, perception of what Forex Trading in particular and trading in general actually are. Those who are approaching these activities, and perhaps have not even completed an adequate training path, believe that speculative investment can represent a turning point in their lives. In some cases, it is, but being guided by this thought is not a wise choice. The risk, in fact, is precisely that of creating unrealistic expectations. These expectations affect not only the trader's morale (when they come back into contact with reality) but also their operations, as unrealistic expectations often translate into equally unrealistic goals.

Stopping to Study

Less experienced traders, but also those who have been practicing speculative investment for some time, often make this mistake. That is, believing that the training path is linear, that it has a beginning and an end, and that this in any case precedes the start of the trading career. Obviously, this is not the case. At first glance, it seems like a venial error that does not significantly affect the results. However, in the most unfortunate cases, it can generate dramatic effects. In particular, when the market is going through a phase of change or transition, or when the pre-trading training path has not been completed correctly. In the first case, the tendency not to study puts the trader in a situation characterized by the inability to understand and interpret the world around them. In the second case, the gaps that have developed during training will eventually make themselves felt, jeopardizing the traders.

Operating with Poor Discipline

This point, namely the value of discipline, is not easy to understand. Also because it clashes with the stereotype of the trader, which portrays them as if they were "a market animal," a kind of genius who, with intelligence and intuition, is able to make money hand over fist. Clearly, this is just a movie stereotype. In reality, the successful trader is more of a workhorse, a market operator who operates with discipline and rationality. Discipline, then, has not only a moral function (in fact, morals have little to do with it) but also one of utility. It is thanks to discipline that the trader manages to escape the power of emotions and manage operations in adherence to the rules they have imposed on themselves.

Trading Without a Detailed Plan

The plan is the most important and effective tool, among the few in the hands of traders. It is thanks to the plan, in fact, that - like discipline - the trader manages to operate rationally, without getting involved in emotions and succumbing to their own emotional sphere. It is, very simply, a matter of drawing up a kind of protocol that suggests when (in the case of which signals) and how to trade. A good trading plan also takes into account a certain number of unforeseen events. Those who have drawn up a good plan know exactly what to do and when to do it. Therefore, they are not called upon to decide anything, or almost anything, in the operational phase, which is then the most dangerous from an emotional point of view. Those who trade without a plan essentially operate blindly, adopting an approach that can be traced back more to gambling. An approach, in short, that is indeed capable of leading to financial catastrophe.

Practicing Revenge Trading

The term revenge trading refers to the opening of positions that are not strictly contemplated by the plan, at least not in size, and whose sole purpose has nothing to do with a healthy investment logic. The purpose is, in fact, "revenge." Obviously, not against some individual but against "adverse fate." Those who practice revenge trading do so to make up for it, to recover what they have lost in previous trades. There is nothing wrong with trying to recover capital, let's be clear, except when it is done in a "revenge" style, that is, when one lets oneself be carried away by emotions of retaliation. The only way to make up for previous failures is to roll up your sleeves and start over, perhaps tweaking the plan, if the losses are not the result of an unpleasant contingency and, in reality, have a systemic origin.

Practicing Overly Complex Technical Analysis

One of the prejudices related to the world of trading, and developed within it, starting from the traders themselves, consists of a sort of apology for complexity. For some, complexity is synonymous with effectiveness. There are traders who almost consider it a source of pride, a sort of medal to pin on their chest. This is a wrong way of thinking, a harbinger of potentially negative consequences. Especially when it influences the way of doing technical analysis. This approach consists of using complex indicators, and above all using many of them when it would be enough, at least in certain cases, to take into consideration more easily interpretable elements (e.g., lows and highs). It is a dangerous attitude for two reasons: firstly, because in trading as in life, complexity must be governed and this is the prerogative only of experts. Secondly, because very simply it generates, at least as far as technical analysis is concerned, false signals.

Relying on Wrong Information Sources

This is a bad habit that concerns fundamental analysis and that, in a certain sense, represents the opposite of the one previously analyzed. Some traders show a tendency to prefer easily available and interpretable sources of information, which, however - precisely by virtue of an underlying superficiality - turn out to be wrong or worse, biased. For example, some analysts are not independent, often openly, they carry water to the mill of the institutions for which they work. They offer simple and ready-to-use interpretations, and for this reason, many traders take the bait. The truth is that fundamental analysis, just like technical analysis, must be carried out in the first person, making "first-hand" efforts.

Operating with a "Profit Mindset"

The term "profit mindset" indicates a mental setting characterized by the tendency to consider profit as the most important motivational source, from which all others descend. Now, it is obvious that all traders operate to earn money, otherwise trading would be a leisure activity. However, this must remain an underlying motivation, it must never turn into a specific goal. Experienced traders do not start, in fact, by defining the amount of money they intend to earn. It is a wrong approach, which quickly translates into setting unrealistic expectations.

Exaggerating with Financial Leverage

This, more than an incorrect habit, is a real mistake, fraught with negative consequences. Financial leverage, in fact, is a double-edged sword. It increases the potential win, of course, but it also increases the potential losses. So if you trade on leverage, you risk losing a good part of your capital. However, using leverage according to some is a forced choice, if you start with a small capital. How to get around this problem? Very simply, wait some time before trading, accumulate money so you can start your trading career with your back covered, and without needing leverage. Or, if you really need it, don't go beyond 1:30.

Neglecting the Impact of the Spread

Obviously, we are not talking about the spread that the newspapers talk about, that is, the interest rate differential between Italian ten-year government bonds and German ten-year government bonds. The spread that Forex traders must take into consideration is the one imposed by brokers, the difference between the market price and the price that the brokers themselves impose on users. Obviously, this is a problem that only concerns those who use market maker brokers, who use spreads as a (legitimate) business model. The truth is that the spread risks eroding, and by a lot, the profits generated by winning positions. So in the planning phase, consider the spreads.

Neglecting Money Management

Money management is a fundamental practice not so much to make money with Forex trading, but to survive Forex trading. It is that discipline that allows the trader not only to predict how much they can earn but also to predict how much they can lose. And, if you have this information, in a sense you take control of the risk. Now, Money Management is certainly not an easy discipline. Moreover, it is also rather boring. However, it should not be neglected. It, in fact, can be considered as a kind of insurance, a policy against catastrophe. In addition, it feeds into trading the feeling of having things under control, a feeling that is undoubtedly beneficial, which limits the effects of fear.

Holding a Losing Position for Too Long

The market is always and in any case constantly evolving. An asset can turn around in any context, in any situation. A winning trade can become a losing one and vice versa. In particular, the hope, indeed the conviction that a defeat can turn into a victory determines one of the worst habits of all: holding a losing position for too long. When you go beyond the evidence of technical analysis, the indications suggested by your own trading plan, it is not the rational element that keeps hope alive, but the emotional one. Therefore, you are trading at random. A drift that, as can be seen from the previous paragraphs, is always best avoided.

Neglecting Stop Losses

Stop losses represent one of the most effective risk management tools of all. They allow, in fact, to close a position automatically (or almost) when it is unrecoverable. Stop losses, therefore, serve to limit losses. It is precisely this function that prejudices their use, which makes systematic use difficult. Those who set a stop loss, in fact, take into account that they can lose. A conviction, an awareness, that beginners, a little out of fear and a little out of inexperience, find difficult to mature. So, if you are among these, take heart, make this mental transition and get used to always setting the stop loss.