To understand the complex nature of heterogeneous psychiatric disorders, scientists and clinicians are required to employ a wide range of clinical, endophenotypic, neuroimaging, genomic, and environmental data to understand the biological mechanisms of psychiatric illness before this knowledge is applied into clinical setting. Machine learning (ML) is an automated process that can detect patterns from large multidimensional datasets and can supersede conventional statistical methods as it can detect both linear and non-linear relationships. Due to this advantage, ML has potential to enhance our understanding, improve diagnosis, prognosis and treatment of psychiatric disorders. The current review provides an in-depth examination of, and offers practical guidance for, the challenges encountered in the application of ML models in psychiatric research and clinical practice. These challenges include the curse of dimensionality, data quality, the 'black box' problem, hyperparameter tuning, external validation, class imbalance, and data representativeness. These challenges are particularly critical in the context of psychiatry as it is expected that researchers will encounter them during the stages of ML model development and deployment. We detail practical solutions and best practices to effectively mitigate the outlined challenges. These recommendations have the potential to improve reliability and interpretability of ML models in psychiatry.