Getting into trading is no easy task. As we have written in our previous article on How to get started in trading, there is no one road to success. Every trader will need to find his own path to success and profitability. Whether we are talking about the instruments you will choose, the strategies you will apply, or the indicators you will follow, for many people they will all be different combinations of things. And those will depend on your interests, influences, how your mind works, and many other things. Some will trade the news, others will trade only according to certain technical indicators of their choice. And that is all okay, as long as you are learning, and in the end, making a profit.
However, as different as these paths to success can be, there are quite a few common rules to follow and mistakes to avoid. In this article, we will be looking at the most common mistakes traders make. These mistakes are especially common to beginner traders, however, some are also prevalent in the more experienced of minds. These mistakes range from poor decision making to lack of preparation, to trading based on emotion. And they are what usually breaks a trader. A lot of them are interrelated and you will easily get the full picture as we go along.
So, without further ado, let’s dive into the most common mistakes that traders make, which you should avoid.
1.) Lack of preparation
One of, if not the most important mistakes traders make is trading without enough preparation. This is especially true for beginner traders since they are the ones at most risk here. Think of not being experienced enough to trade, not knowing how to trade the markets in the first place, but instead of going with a demo trading account, or going small, you open an account with a broker and make a big deposit. This might sound far fetched for some, but it does happen. Another day or week passes, and the account gets burned. If you are looking to spend money gambling – go for it, but know what you are going for and know what you can expect to get from trading at high stakes without knowing what you are doing. Which is exactly that – a quickly burnt account.
This common mistake can also apply to experienced traders. Think about knowing what you are doing for the most part, however, not doing your homework. Every trade needs to be disciplined, thought about and not impulsive. If you are trading weekly oil inventories, on the basis of statistical analysis, and you do not crunch the numbers, but rather just go for it expecting to wing it from your experience, it is still the same mistake you are making. That is, you are not prepared for that particular trade, and you should not be going into it. Always try to stay disciplined and conscious of your decision making. It is rather easy to let yourself get loose and start gambling with your money. It is much harder, however, to recover those bad losses that you could have avoided in the first place.
2.) Expecting to get rich quick
Another common mistake you can make prior to even starting to trade is expecting to get rich fast. If you do have this expectation somewhere deep in your mind, you have to realize, you will need to let it go. This powerful expectation will be fuel to your fear and emotion-based trading. It will affect most aspects of your trading, especially your decision making.
Why so? Because you will be going through an amplified emotional rollercoaster that will mess you up at least whenever things go wrong. Think of making a losing trade, and fearing to realize the losses, only to dig your hole deeper. Or think of realizing those losses, but feeling like things are not going your way the way they are supposed to be going. And then making an emotionally-charged trade to make up for your losses that day. Eventually, this pattern will lead you to make bad decisions, and blow up your account or keep losing money.
Most experienced and successful traders know that they can expect to be profitable in the long term, however, it is a long term. They are less affected by both, the gains and the losses. They are much more neutral and know they will be making losses at times, which is part of the life of a trader. This does not affect how they feel about a particular trade or their strategy as a whole. They keep disciplined and focused, and do not let false expectations get the best of them.
3.) Not treating trading like a business
Many people that are attracted to trading usually like to be their own bosses. They generally don’t like to be told what to do by a superior. While it can be a good trait, inspiring you to create your own business, it does come with its own challenges. For instance, if you are of such a personality, you might be too loose on yourself. However, if you are going into trading, if the only boss you ever have is you, you better make sure that that boss is the strictest boss you will ever have. That is, treat your trading like it is a business and really, be your own boss, in its fullest sense.
That might mean you will have to narrow down your focus and cut loose other activities you have taken up or enjoy doing in your spare time. That may mean that you will have to take trading full time. Or at least see it as a full-time activity in your future. While there are exceptions – for instance, having to work another job to build up that capital for your trading account, generally you are looking to treat it as a full-time business in the long run. If you don’t, you have a high risk of not staying on top of things, not being prepared enough, etc. and etc.
4.) Entering a trade without a plan
Every trade not only has to have a reason behind it. It also has to have a plan. That is, what are you going to do if the price goes in your favor? What are you going to do if the price goes against you? Which take profit and stop loss levels will you set? What if the price goes sideways? What will you do if an unexpected event comes about? These are only some of the questions you need to be asking yourself whenever entering a trade. If you enter a trade without such a plan, you will set yourself up for a big potential disaster.
Imagine not knowing what to do in each scenario, and one of those scenarios plays out. You will be playing a guessing game at best. This is where preparation that we have talked about before comes about. You will need to prepare yourself for every scenario there is, broadly speaking, to avoid making bad decisions.
5.) Allocating too much capital to a single trade
Trading involves losses. For some strategies, the nature of them can be such that more than 50% of your trades will incur losses. (However, you will make up for them by having larger wins than losses.) Not only do you need to be mentally prepared for that, but you also have to play it smart with your money. Capital management is key here, and you do not ever want to be allocating too much capital to a single trade. That is because you do not know which trades will perform well, and which ones will not. You do not know which ones will be profitable, and which ones will incur a loss.
It may sometimes seem like you know exactly which direction the trade is going this time. Like it is the trade of the month, and you need to invest heavily in this trade. However, bear in mind that this is mostly your fear of missing out playing games with you here. In reality, and in general, you have roughly equal chances of making a profit today versus tomorrow. So, do not allocate too much capital to a single trade.
6.) Trading without a stop loss
Another big mistake is actually having no stop losses in your positions. It is a common mistake made by those just beginning to trade. It might seem risky to put a stop loss on your position – what if the price rebounds just after it hits the stop loss? However, an even larger mistake is to not have any stop loss in the first place. You should know what price level change means that your trade did not go as planned. That would mean that your call was wrong on this trade, and you need to get out of it. Making and realizing losses is okay, and is a normal part of trading. No one successful trader can make profitable after profitable trade without ever incurring a loss. You should always keep that in mind and be sure to have stop losses in your strategy.
7.) If you keep losing, do not keep trading
This common mistake mostly comes about due to two things. First, you might be having a really bad day, where nothing is going your way. Second, your strategy might simply not be working in the long run, and that’s why you keep losing.
As far as the first one goes, if you are having a bad day where nothing is going your way, it is usually best to call it a day and just defer trading to another day. If you don’t, you are at risk of making bad decisions due to being stressed out and emotions coming into play. Trading is a stressful occupation and persistent or large losses can break even the toughest and most experienced of traders. Do not keep putting yourself down for having a bad day, it happens to everyone.
As far as the second one goes, sometimes your strategy simply does not work. Whether it is due to bad timing of the market, or some inherent flaws in the strategy, if you keep losing on your strategy in the long run, do not keep trading – try and make adjustments to your strategy, or simply look for a better one. It is probably one of the harder things to do, since it may feel like a defeat, however, bear in mind you may have to lose a few battles to win the war.
8.) Trying to predict the news
News trading may seem lucrative because there is so much action going on at the time. More action means volatility, which means more potential and quicker gains. Who wouldn’t want to make 50 pips in a few seconds? However, there is no free lunch in trading, and volatility has a downside too: whatever applies to the upside, also applies to the downside. That is, you are equally likely to lose or make a profit if you are trying to predict the unpredictable.
While it is sometimes possible to somewhat gauge what is the more likely outcome based on statistical analysis, it is usually extremely hard to predict news releases, such as the Non-Farm Payrolls, for example. Especially if you are a beginner, and are there just for the action and for the excitement, it is best to steer clear of entering a position before the news release comes out.
9.) Making multiple correlated trades
As a trader, you not only need to allocate the right capital to each trade but also make sure that your trades are not correlating in a major way. For instance, if you were to trade AUDUSD and Gold between 2011 and 2015, you would have basically made a double bet.
The correlation between these two assets in that period was rather high, and would have led you to have realized excessive losses or gains. It is necessary to know such correlations before entering a position in order to not double your bets.
10.) Trading assets with little volume
This especially applies to low volume stocks. You do not want to be trading low volume assets or during periods when there is low volume. This can sometimes be before crucial news releases, such as Non-Farm Payrolls or company quarterly releases, or trading hours in other sessions. Trading against this will result in you having to chase a wide spread and take on a much worse price than you need to.
In this article, we have outlined 10 of the most common mistakes made by both beginners and more experienced traders. They ranged from preparation to decision making, to capital management and more. What probably is beginning to become obvious is that trading involves a lot of discipline. Since it is easy to lose yourself in emotion and impulsiveness, it is a very useful trait in trading. Also, preparation and knowing what you are doing is key, as it will allow you to avoid some big errors and save you losses.
It is said, it’s always best to learn from others’ mistakes, rather than your own ones. However, it is usually a very hard thing to do. Hopefully, this article will help you avoid some of them, and not keep doing the same ones over and over again, by being more conscious of them.
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