Most people only highlight their investing accomplishments. But I’m going to talk about one of my failures and how you can avoid the same mistakes. I made the mistake in the foreign exchange market but this mistake could apply to practically every market because it involves trading psychology.
One thousand, seven hundred and sixty dollars was what I deposited into my first forex trading account. Most forex traders blow their first account and I was no different. By the time I had finished ‘trading’ I was down to $50 dollars. But if you listen carefully and take notes you might not make the same mistakes I did.
When I first learned about the foreign exchange market I was very excited, to say the least. At the time, with about $37 dollars you could control $10,000 dollars worth of currency. I had been introduced to leverage before with options and futures but most of the options and futures brokers require a higher amount of margin on deposit to get started trading.
Being a college student, I didn’t really have large amounts of cash to start investing, so I decided to get into forex to grow my capital and get rich fast.
Mistake 1: Focusing only on what I would make and not what I would lose
My first mistake was getting into forex with the idea that I would make tons of money and not lose any. All of my projections and profit targets never took into consideration any losing trades.
I planned budgets and future trades based on winning every single trade I made. I ignored the statistics that most day traders lose money and that most first time forex traders blow their first account. I was going to be different.
And it worked…for the first few days.
Mistake 2: Not Controlling My Emotions: Greed, Fear and Revenge
My first few trades were all profitable. My account went from 1760 to 2100 dollars in 3 days! Then I got cocky. I thought I couldn’t lose.
The next morning I made 81 dollars before I even got dressed for the day. I visited a friend and traded a few times before I got to his house. I placed a really big trade with my can’t lose attitude and lost 300 dollars in one morning. That was all the gains I had made to date. I was pissed, so I tried to get revenge on the market and I lost another 300 dollars.
Mistake 3: Not Following My Rules
I lost the first 600 dollars because I didn’t control my emotions and because of those emotions, I threw my rules out the window. A good trader is like a scientist. She formulates a strategy, back tests that strategy against history, forward tests that strategy with a paper trading account and then puts that strategy to work in a live account. If at any point the strategy doesn’t work, she fixes what was wrong in any of those steps and starts again. I had an airtight strategy that I had tested using each of these steps. But trading in a live account with large amounts of leverage can cause any new trader to forget every good habit they learned; especially when one loss wipes out all of your gains.
Mistake 4: Ignoring the Risk to Reward Ratio
It took me about 3 trades to make the first 300 dollars. It only took 1 trade to lose all 300 dollars. That was because I did not pay attention to my risk to reward ratio. I would place a trade with a 100 pip limit and a 300 pip stop. (A pip is the name for the smallest movement in a currency price. For my leverage 100 pips was 100 dollars.) If I paid attention in my statistics class I would have never set up my trades this way.
If I assume that 50% of the time the market will go up and 50% of the time the market will go down, I should also assume that I have a 50-50 chance of being right. With this probability, in order to grow my portfolio, I would have to make more money when I win and risk less money when I lose. I didn’t do that.
After losing a few more trades to fear and greed and statistics, I was down to only 50 dollars. I withdrew the last of my money, whipped by the market. But really I was whipped by my own mind.
Reformed Forex Gambler
I’m very proud to say that I have since learned my lesson. It cost me $1760 dollars to learn it but I am a very disciplined trader now. I follow my rules on every trade. I give every trade at least a 2 to 1 reward to risk ratio. I don’t let my emotions control me. And I’ve been profitable ever
on every trade since! (I am profitable overall, I still lose trades and win trades. Check out the About Page to learn how to keep up with my trades.)
Let’s hope you don’t make the same mistakes I did. But if you decide to ignore me, at least you can say you were warned.
What happened with your first forex account? Any tips for new forex traders?
Photo Credits: http://images.businessweek.com/ss/07/08/0823_day_trader/source/1.htm