If one thing is for certain, forex trading has surged in popularity in the last few years, especially with the allure of its flexibility, its potential to be a lucrative business, and the sheer amount of new prop firms and opportunities for funding that have popped up over the years. However, just because forex trading seems lucrative from the outside, doesn’t mean that the path to success isn’t riddled with challenges and pitfalls. Understanding these roadblocks that every aspiring trader faces is important so you don’t get trapped in a never-ending cycle of boom and bust in your trading. And yes, that includes forex, futures, or stock traders too! 

This guide will aim to help arm you with the right knowledge so you can avoid making common mistakes, and build a strong foundation for success by taking a more informed and strategic approach to your trading.

Mistake #1: The Lack of a Well-Tested Forex Trading Plan

Attempting to tackle the forex market without a trading plan is really no different from gambling at a casino. No matter what pair or financial instrument you trade, it’d be a huge mistake to put real money on the line taking trades in the live market without a proper plan, but that often doesn’t stop beginners from doing this. At Phantom Trading we suggest starting out with sim-trading and a demo account if you’re looking to just get your feet wet.

We also recommend putting together a personalized, tested trading plan (in demo and sim) before trying to trade with live funds, or even attempting a prop firm challenge.

Solution: Start by setting clear and achievable goals using something like our funded trader roadmap. Either develop your own trading strategy from scratch, or build one using a framework like the Phantom Trading strategy. 

Educate yourself on the basics of risk management, chart analysis, and build up your trading psychology by starting small and scaling up. Practice trading in a range of market conditions using a forex simulator like FX Replay, and a demo account to practice in the live market without putting real money on the line.

Mistake #2: Overleveraging and Overrisking

Another common mistake that beginner traders make is overleveraging and overrisking. It’s easy to say you’re an amazing trader if you’re risking 5%, 10%, or even 20% of your total account balance, and you happen to catch a couple of lucky trades, but are you really going to be able to sustain that in the long run? What if you had hit a losing streak? That’s the point we’re trying to make with this one. Overleveraging is a common trap that many new traders fall into because they fail to understand the true risk on the table.

Solution: Spend time learning what overrisking and overleveraging is, what risk of ruin is, and what account durability is. Depending on the type of account you’re trading (personal account vs prop firm account), strategy, and system you employ can have a drastic effect on what your account durability is like in the live market. 

Set strict risk management rules and stick to them so you can protect your capital. These habits are best built in sim and demo before taking it to a challenge, funded, or live trading accounts.

Mistake #3: Ignoring Your Risk Management Rules

Ignoring your pre-determined risk management rules can be the difference between keeping and blowing your trading accounts. Again, this is another major pitfall that new traders tend to fall into because they succumb to their impulses. Experienced traders do not break their rules under any circumstances. 

Solution: Use stop-loss orders and respect your max daily loss rules. Do not alter your position sizes unless your plan specifically stipulates that you’re allowed to. Ensure you understand the average win rate and average winning trade versus average losing trade within your trading system by testing it.

Lastly, if you feel the impulse to revenge trade to recover a string of losses, walk away from the charts! You can’t lose more if you’re not taking more trades! Exercise self-control.

Mistake #4: Overly Emotional Trading

Similar to the last point, overly emotional trading leads to devastating trading errors that will blow your account. Emotions can easily cloud your “judgement, akin to driving under the influence of alcohol, there is a time and place to be taking trades, and it’s not when you’re tilted after a string of losses, or on a high after a string of wins. Impulsive decision-making stems from a lack of emotional intelligence and emotional discipline. Fortunately for us, it’s a skill that can be honed just like anything else in the trading game, so don’t worry if you’re struggling with this one.

Solution: Develop a more disciplined approach to your trading. Stick to your trading plan and void making decisions based on fear and greed. If you notice yourself getting overly emotional, simply walk away from your trading terminal or close your trading app. Additionally, if you want to hone your trading psychology we recommend checking out one of the many amazing books dedicated to this subject like our review on The Disciplined Trader by Mark Douglas.

Mistake #5: Failure to Adapt to the Forex Market

The forex market can be a very unpredictable beast. With its wide range of market conditions and volatility, this market is constantly evolving. Having a plan that is too mechanical and doesn’t account for the dynamism of the market can cause you to perform poorly in the long run. This is especially true for huge swings in volatility in the market caused by economic news or geo-political events. The sooner you understand that the market constantly fluctuates and goes through ebbs and flows of high and low volatility, the sooner you’ll find the consistency you’re after as a trader.

Solution: There is no easy way around it, as a trader it’s your full-time job to constantly test and improve upon your trading plan by doing a mix of simulation, demo, and live trading to ensure you maintain a positive edge in the market. What worked today has no guarantee of working tomorrow. At Phantom Trading we’re constantly working to ensure we provide a comprehensive enough framework that is also moldable to each trader’s personality and trading style.

Mistake #6: Overtrading

Overtrading happens when traders succumb to the thrill of trading through FOMO (fear of missing out), or because they’re desperately trying to recover from a string of losses, causing them to execute more trades than their strategy typically calls for. This can lead to decision fatigue which results in diminished focus and a higher chance of making trading errors. This also always devolves into revenge trading wherein the trader forces trade setups that aren’t necessarily high probability or high quality to recoup losses.

Solution: The best way to combat overtrading is to simply set a hard limit on the number of trades you’re allowed to engage in on any given day, regardless of the outcome. Trust us, this will save you from giving back profits after a string of amazing trades too. 

No matter how good your strategy is, there are always going to be scenarios where you’re going to inevitably hit losing streaks, and especially so if they’re not good high-quality trade setups that fit your trading plan!

It’s important to establish strict criteria for trade entry based on your trading plan and the trading framework you’re basing it off of. Recognizing when you’re overtrading can be tough, but if you do notice yourself forcing trades, simply take a step back from the trading terminal and call it a day before it spirals.

Mistake #7: Rushing or Neglecting Your Technical Analysis

The next most common mistake that beginner traders make is rushing or neglecting to perform proper technical analysis at the start of your trading session. Because trading can be so complicated and have such a high learning curve it’s easy to rush or skimp out on properly analyzing the market from the top down which effectively leaves you with blind spots for what might happen within the trading day. 

Jumping into positions based on gut feelings or incomplete information is a surefire way to erode your trading edge into nothing. Overlooking things as simple as high-impact news that is going to be announced for the day can have a devastating effect on your P&L, and can result in blowing trading accounts that don’t allow trading news.

Solution: The solution for this one is simple, allocate an appropriate amount of time for doing your top-down analysis of the markets and trading instruments you’re trading. If you’re a beginner and you’re still not that well versed in analyzing the market, allocate more time so you don’t rush the process. 

Good traders come prepared to the market, inexperienced traders jump in and take trades based on hastily prepared research and shoot themselves in the foot by entering positions based on half-baked trade ideas.

Mistake #8: Trading High-Impact Forex News

As we mentioned previously in this article, trading high-impact news in any market is a great way to gamble, but not a great way to trade. While some professional traders do trade news, we always advocate for avoiding high-impact news events because it’s just plain risky.

Even if you’re in a position that is running in profit, volatility can spike to astronomical levels as liquidity dries up in the market leading to things like slippage which can either amplify losses or blow your trading accounts.

Solution: This one is simple. Don’t trade high-impact news. A good barometer for deciding whether or not to trade a high-impact news event is to check if it’s restricted by the prop firm you’re trading with. No one wants to blow a prop firm account. Alternatively, you can check forex news sites like Forex Factory and navigate to their economic calendar so you’re aware of any big news events that are around the corner. We suggest doing this daily as a part of your trading routine. 

Mistake #9: Not Journaling Your Trades

Utilizing a trading journal is essential for self-awareness and continuous improvement as a professional trader. Neglecting to maintain a trading journal means missing out on extremely valuable insights on your trading habits and strategy. When starting out many traders may feel like journaling is a chore because it’s so time-consuming and cumbersome, but we insist that it’s probably the most important tool for new and experienced traders alike.

Solution: Journal your trades using an automated forex trading journal like Swift Journal. Alternatively, you can always use a free tool like Notion or even Google docs, but they will lack the robust features and automation that takes most of the legwork out of the journaling process. We also recommend keeping a written journal on the side to keep a tab on your emotions while trading. This coincides with many of the previous points we outlined within this article.

Mistake #10: Failing To Invest Enough Time Into Learning

Trading is a complex and time-consuming endeavour for 99% of people who attempt it. This is not just a business you can jump into and turn a consistent profit with, out of the gate. It takes time to learn the mechanics of trading, and it takes time to learn about the markets. Jumping into trading a live account or prop firm challenge without an adequate understanding of how the market operates or a trading plan is almost always going to result in blowing your account.

Not only do you need to learn the technical analysis side of trading, but you’ll also need to build domain experience (first-hand experience) by actually trading in a live market environment with something on the line to see how you manage your emotions and trade psychology. 

Solution: Prioritize education and studying the markets as an integral part of your trading journey. Don’t just slap on orders because you feel like it and expect to become a millionaire trader overnight. Seek out reputable mentors like the ones we have at Phantom Trading who are funded traders with a track record of producing a positive return in the market. Immerse yourself in a community of like-minded traders to make the learning process more engaging.

In Conclusion

Forex can undoubtedly be a lucrative business if you’re able to overcome the many challenges it’s going to inevitably throw your way in your journey to consistency and profitability. However, that’s what makes it such a rewarding business to get into. As a trader, it’s your job to improve constantly and build processes for yourself so that you can achieve long-term profitability and create a true career as a professional trader. Once you prove consistency and profitability, the opportunities for getting funding through prop firms and private equity are endless.

If you are thinking of starting trading, are new, or are an experienced trader who is looking to improve your skills, we at Phantom have a wealth of useful information on this website and the Phantom Trading Youtube Channel where you can learn more about what it takes to become the best version of your “trader” self.

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Robert Castillo
@coldwaterfx
FX Trader & Analyst
Writer & Editor

Rob is a funded trader from Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading, he enjoys making music, boxing, and riding motorcycles.