Biggest forex beginner mistakes - no trading plan
Entering the forex without a trading plan is nothing short of suicide and yet it's one of the most common mistakes forex beginners make. It's like starting a business by renting office space and hiring staff but not having any sense of the market, the competition or even what kind of product you are going to sell.
If you're wondering why 90 percent of forex beginners lose money trading currencies, this is the reason: because they don't have any trading plan whatsoever.
All successful forex traders use a trading plan and many of them will tell you that they treat trading as a business. They have a clear and realistic vision on what they want to achieve, a trading strategy that fits their personality and circumstances, an exit strategy as well as an entry strategy. They also take time to evaluate and adjust their plan while they're out of the market.
The thing is, for most forex traders the problem isn't in developing a trading plan, it's in following it. There is an old saying among traders: 'Plan your trade and trade your plan'. It's the second part of that saying that's the most important. Think about it: if you have a great plan but you're not following it, what good will it do you? Then again, if you have a shitty plan that you follow to the letter, you could at least improve it through evaluation.
How to build a great trading plan
So what does a good trading plan look like? Well, first of all you have to take your own personality and circumstances into account. For instance, a good trading plan has realistic goals, and to arrive at them you need to take into account how much trading capital you have at your disposal and how much time you can set aside for trading and learning about trading.
Not every trading strategy is suitable for every trader. Some strategies yield a high percentage of small winning trades, others a low percentage of big winners. For some strategies you only have to set-up new positions about once a week, others are meant for intense intra-day trading. This is why Forex for Ambitious Beginners has a section on self-assessment, to help you determine what kind of trading personality you have.
Self-assessment will help you find the trading strategy that's right for you, so that you can create working set-ups. A set-up is basically a collection of conditions that have to be met before a trade is opened and closed. For example, if you think trend trading suits you best, you could create a set-up for trading the AUD/JPY.
Remember that one of the most important parts of your trading plan is your exit strategy. Setting (and keeping) a stop loss and profit target is often what makes the difference between being a successful forex trader and a losing one, so be sure to spend time on this.
Another important part of your trading plan is evalution. You can't expect your trading plan to be perfect from the get go, in fact you can't expect it to be perfect ever. You need to regularly evaluate it, in order to find and deal with leaks and weak spots, to improve your Expected Value.
So keep records of your trading. For a single position, you could note things like: what currency pair, what was the set-up, entry, exit, profit. Forex brokers usually keep a history of your trades as well, but the more information you write down about a trade, the more information you have to tweak your trading plan later on.
To sum up
For many forex beginners trading is an emotional business, but it shouldn't be. You shouldn't enter the market on a whim or follow a strategy because your friend says it did wonders for him; you shouldn't keep a position open because you can't bear to take the loss or trade with money you can't really miss because you are trying to reach a goal that isn't realistic to begin with.
Find out what kind of trading personality you have, factor in your personal circumstances and build a trading plan around that. Then keep to that plan while you're trading and evaluate it regularly when you're out of the market, continuously improving upon it. That's how you go from struggling forex beginner to successful forex professional.
You can find more about creating a forex trading plan in the book Forex for Ambitious Beginners.