Top 6 Common Trading Mistakes

Education /
09 Dec 2019

 In his book ‘Pit Bull’, legendary Wall Street trader Martin Schwartz shared both the lowlights and the highlights of his stellar trading career. In his typical flamboyant fashion, he recalled how he lost $10,000 within a few hours of putting on his first trade.

But what’s outstanding about this book is how Schwartz openly discussed the trading mistakes he committed, particularly when he was a newbie trader. And he also shared how he learned and corrected those mistakes. And as they say, the rest is history as he became one of the most successful and famous traders in the world.

Schwartz’s book is a practical and realistic reference to the most common trading mistakes. And there’s no doubt that most traders – if not all – would have made or are making the same mistakes at one time or another.

Making trading mistakes is part of every trader’s journey. Whether you’re new to trading or even if you have been trading the markets for decades, chances are you will make some mistakes.

Some trading mistakes are more costly than others. And the fact is there are some mistakes that are hard to accept. And for some traders, ignoring a mistake and repeating it over and over again can spell the difference between becoming a successful trader or a losing one.

In this article, we will look at  the 6 main trading mistakes commonly committed by traders. It could well  be in your best interest to be aware of and to avoid them at all costs.

So, what are considered the top-6 trading mistakes?


1. Trading without a plan

Most successful traders are happy to talk about their trading plans. Though they may not give you all their ‘trade secrets’, many are most likely keen to share their high-level strategy behind their trading success.

On the other hand, some traders dive into trading without any plan or preparation, only to find trading is not as easy or simple as they initially thought. The fact is, to be successful in trading you need to have a plan of attack.

Some of the items you can include in your trading plan are:

  • What market to trade – will you be trading Forex only? Will you be trading Commodities, Indices as well?
  • Your trading capital – how much money will you allocate to trading? Where are you getting this money? Is this part of your savings? Will you be borrowing money to start trading? How will you repay the money? Is it money you can afford to lose?
  • Your trading strategy – will you be a short-term trader -i.e. day or intraday trader? Will you be trading over a medium-term or long-term – e.g. weekly trades?
  • Entry and exit strategy – once you have determined the market you want to trade, you need to identify the entry and exit levels you want to use even at a high level first. Identifying the entry and exit level may need a day-to-day review particularly for a fast-moving market like the Forex market. But the important thing to consider is to make it a part of your trading plan.
  • Proper and solid risk management strategy - What risk management and capital protection have you got in place? In terms of position sizing, how much will you allocate per trade? How much can you afford to risk per trade? Where will you place your stop loss? What is your strategy once you have entered a position - how often will you check it to make sure that it is moving in your favour or not? All these are critical considerations and should be part of your trading plan.

In the same book, Schwartz mentioned how he realised the importance of having a plan with specific goals and time frame. Even before he got his seat at the American Stock Exchange, Schwartz had been working on his overall plan – save up for a substantial trading capital, get a seat at the exchange and become a star trader.

As a trader, Schwartz developed a methodology that fit his personality. His trading plans are detailed enough to the level of what price to enter and where to exit a trade.


2. Taking too big positions

There is no doubt the attraction of a big winning trade is on every trader’s mind. And the temptation to take a big position (thinking it will be a winning trade) is always present.

But as proven time and time again, taking too big a position on a trade can be risky. There is no guarantee the trade will go the way you want it to go. So, if you risk 50% of your capital in a single trade and that trade turns against you, it will seriously dent to your trading capital.

And it may also take a big psychological toll on you as a trader.

In one of his interviews, Mark D. Cook, successful trader featured in Jack Schwager’s book Market Wizards, said: “If you can’t sleep at night thinking about your open trades, then you’re positions are way too large.”

And this is not healthy both for you and your trading capital.


3. Taking too many positions

While there are many markets to trade and numerous trading opportunities every day, taking too many positions may also be detrimental to your trading.

Unless you have a robust and automated trading system that automatically places trades for you, monitoring too many positions can be confusing, to say the least.

Remember the human brain can only deal with a limited amount of information at a time. And the attention needed for each trade means you have limited time and focus to give each trade.

If you take too many positions at one time without the proper automated systems to monitor them, chances are some of those trades will fail.

So, next time you’re trading, be mindful of the number of trades you’re taking. It is best to focus on a few trades first – enter and exit them – then start again if there are other trading opportunities.


4. Over leveraging

The ability to use leverage is one of the attractions in trading the markets like forex, commodities, indices, metals or cryptocurrencies. Leverage allows you to trade a much bigger position even with a small starting trading capital.

But as we all know, leverage can be a double-edged sword. It can amplify both winning and losing trades.

One of the cardinal sins of traders – particularly of those who don’t fully understand how leverage works – is to use a high level of leverage. Some people only see the potential wins and ignore the potential losses.

If you use a high level of leverage and the trade turns against you, this could result in a total wipe out of your trading capital.

So, the best way to use leverage is to start low. Try using the lowest level of leverage offered by your trading provider. Once you are more comfortable with how leverage work, then you can increase the leverage level if you like.

The thing to remember is just because there are high leverage levels on offer – leverage can range from 50:1; 100:1; 200:1 or 400:1 – doesn’t mean you have to use the highest level possible.

As the saying goes, you need to learn to walk first before you run.


5. Revenge trading

Don’t you hate it when you lose? And don’t you just want to get back into the market, take another trade and prove you can be a winner?

That’s exactly the thinking behind revenge trading. You want to get even. You want to prove you’re a winner.

But most of the time revenge trading can bring more pain than gain.

Consider this for a moment. When you get into a revenge trade, you’re most likely not in the best emotional state. You’re most likely still seething or too stressed out to make a sound trading decision. And most likely you haven’t really analysed the next trade – whether it has a good potential or not.

So, the best thing you can do about revenge trading is not to get into one at all.

If you have a losing trade or a string of losses, it is better to step back. Analyse what went wrong. Was the market too choppy to trade anyway? What went wrong with your initial analysis?

Most of the time, if not all the time, it’s best to avoid revenge trades at all cost.


6. Not using a stop-loss level

Trading without using a stop-loss level is like driving a car without breaks. It’s too dangerous.

But despite that, many traders still trade without using this useful tool. And in most cases, it ends up with painful losses. Unnecessary and avoidable losses.

If you use a stop-loss level properly, you can avoid getting too deep into a losing position.

Whether you want to put a ‘hard’ stop-loss as soon as you enter a trade, or you have a ‘soft’ stop-loss level in front of you as you trade, you will be in a better position if you use this as part of your risk management.

In conclusion, we’ve covered 6 of the major  trading mistakes but of course there are more. The idea is to be aware of these with the view to avoid them at all cost. While we all make trading mistakes, it’s best to be aware and to learn from those mistakes.

Like Martin Schwartz, it’s only when you learn from those trading mistakes (and not commit them again) that you can be on your way to trading success.


The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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