3 common mistakes Forex traders make and how to avoid them
The main reason why many people struggle to make it as traders.
I’m not talking about the common mistakes or common reasons that we’ve all heard about – that excessive use of leverage, not using stops, or not having a trading plan.
Instead, I want to discuss the actual buying and selling process. I want to teach you where on a chart you should be buying, and where you should be selling. I want to show you where to put the high probability trades and how to avoid the ones that are going to give you high risk.
Ready? Let’s get started.
Trading is simple, but just not that easy.
I’m sure you’ve heard that expression before.
I don’t think there’s a statement out there that reflects the trading business in a more accurate way, which is why I often wonder why many aspiring traders that are coming into the markets for the first time make life so difficult for themselves – putting the odds against them on everything that they do.
We’ve read the books. We’ve seen the YouTube videos. We know about the main reasons why traders fail. The excessive use of leverage, taking on too much risk, not using a stop loss, and not sometimes even having a trading plan.
For the sake of this blog, I’m going to assume that you’ve got that inside your head. Today we’re going to talk about the three real reasons why many traders fail when it comes to reading a chart.
1. Most traders don’t look at the bigger picture
Many traders will get fixated on a particular time frame. Whether it is one hour, four hours, one day, one week – they’re unaware of what’s going on in the bigger picture.
When I’m trading, I’m always looking at the markets with the top-down analysis approach. I’m always looking at the higher timeframe. And by doing so, it does not only puts the odds in my favour, but it also keeps me out of trades which increases my win to loss ratio.
Let’s assume that I’m trading on the one hours time chart. I always want to be aware of what’s going on on the four hour and the daily time frame as well.
The best way to plot support and resistance, on the daily and on the higher timeframes, is to use the line chart. The line chart reflects the closing price in that particular time period. It shows you who won the battle. It ignores the extremes of the wicks.
These are very powerful levels on the daily and certainly on the weekly as well. So it’s imperative as a trader that you know exactly where these levels are on the higher time frames. We plot these in at the key turning points or levels that have been respected on more than one occasion.
Afterwards, we toggle back to the candlestick chart.
That shows you now with the wicks, and how their wicks were the extremes.
Once we’ve done the daily, we drill down to the four hours and do the same.
The trick is not to place lines at every turn, but just the key levels. Otherwise, you’ll have more lines on the charts and you’ll end up never being able to take a trade. So just click your lines in at the key levels, at the key turning points.
When you’re trading, it’s always worth having a cast to the right of the screen. In my case, to look at the higher periods and to make sure that you’re not coming into a key level.
You need to update these periodically. I like to do mine on a Sunday before the trading week begins. But you must know that these key levels are on the multi-timeframes.
2. Most traders try to outwit the market
Most traders try to be clever. They try to pick tops. They try to pick bottoms. They call the market overbought. The call the market oversold. They try to predict the exact turning point of a market, which is very difficult even for the experienced traders.
The trend is your friend.
So what I like to do as a trader, I follow the trend. And that’s the way I like to attack the market. Typically I’ll have my screens looking something like the example below.
3. Many traders fail because they are over-complicating it
Many traders are loading up their screens with masses of indicators. They’re looking for the holy grail. They put all these things on their charts and then all of a sudden they can’t even see the candles for the indicators.
The best way to trade the markets is to have completely clean charts. Get yourself back to pure price action with a couple of moving averages and at maximum one indicator.
Those are the three common areas where people are failing in this business. They don’t look at the bigger picture, nor do they analyse the market with a top down analysis. Secondly, they are not following the trend. Following the trend has its massive advantages for the new trader. Trying to pick tops and bottoms, although it can be done, it’s a very, very hard task, even for the experienced. And lastly, over-complication with a mass of indicators? Cut it out.
As always, I hope you found this blog useful. Don’t forget to leave a comment underneath to let me know your thoughts! Happy trading and good luck.