Some say there are 7 deadly trading sins but we are aware of more and want to ensure you know what they are so they can be avoided.
Every trader has got at least one of them.
Whether it is a big or small one, every trader has their fair share of trading sins.
Whether you’re new to trading or have been trading the markets for decades, chances are you have experience in this area.
Of course, we’re talking about a horror trade or trades that resulted from committing a trading sin. A trade that has gone so horribly wrong it gave you the creeps and caused you some sleepless nights.
In this post, we will look at some of the most deadly sins of trading and highlight what they are and how they can be avoided.
We will dig deep into the lessons learnt from these common trading mistakes and how every trader can change their method for the better.
Let's start with an example: Trader A heard about forex trading through their social media network of friends. Trader A was interested right away and wanted to try it for themselves.
Like other traders who are new to the markets, they did the right thing by opening a demo account first. And to familiarise with the trading platform they started reading and following some ‘expert’ traders and their suggestions.
Though they didn’t have a good grasp of the forex market yet and being very new to trading, still had to develop a solid understanding of the markets and the currency pairs.
“I started following the experts’ suggestions on which pairs to trade and everything they said, but I didn’t really understand it,” she said.
After a month of using a demo account Trader A saw their account balance rising and decided to open a live account, confident that they could convert those expert insights into a healthy live trading balance.
What Trader A didn't realise was that trading on a demo account is an entirely different thing compared to trading on a live account.
Trader A didn't have a solid trading strategy, no risk management in place and not psychologically prepared to trade. So, when the live account started losing money, they didn't no what to do.
When the account blew up only after two days of trading, Trader A realised that more study was required and they needed to know how the market works and not to trust in ‘experts’ opinions only.
Given all the distractions around us, many traders find it difficult to focus. And this could be challenging especially if markets are moving fast.
Whether a trade is moving for or against you, lack of focus when trading can cost you some money.
And this is what happened to 'Bob' (not his real name).
He planned to do a scalp trade on the XAUUSD (Gold) when he thought he saw a good trading opportunity.
But because he wasn’t focused on his trading, he opened a GBPUSD trade instead. And without double-checking the trade he opened, he found out he opened the wrong trade 10 minutes later.
And by that time he was already down 10% of his capital. Still in a bit of a shock that he opened a wrong trade, he didn’t close it right away hoping that it would come back to his favour. It didn’t.
It was only after he had lost 25% of his capital that he decided to close the losing trade.
As the term suggests, stop-loss orders are orders to let traders stop or cut losses when a trade goes against them.
Stop-loss levels can be set manually by giving yourself a reminder at what level you want to exit a trade at a loss. Most trading platforms also now offer automatic stop-loss orders or levels that can be pre-set for each trade.
But for some reason, not every trader uses stop-loss orders. It is a crucial step of setting up all of your trades and will help you practice proper risk management.
High-impact events are one of the major movers in the forex market. Whether it’s geopolitical tension, political events, central bank decisions or economic announcements, it is best that traders be aware of high-impact events because they can cause massive price movements.
As a trader, if you’re not aware of these high-impact events or if you choose to ignore them, there’s a good chance that your trading account will be affected. Our economic calendar will help you stay up to date on all future events that could have an impact on the markets.
This is what happened to JJ (not his real name) when he was just starting to trade the forex market.
Unaware of the impact of big breaking economic news on the currency markets, he opened a trade on the EURUSD at the opening of the New York session. He went to short the EUR ‘confident that it was hitting a resistance level.’
To his surprise, he saw the chart moving and the EUR candle moving up and down and up again. The trade went against him and the EUR moved further up and breached the resistance level.
Most professional traders and those who have been in the markets for decades always emphasise the need to find your own trading style. Like any other activities or goals in life, trading is not a one-size-fits all.
One trading style may work for you but may not work for another trader. Similarly, what could have been successful for one trader may not work for you.
When it comes to trading, finding your own style, your own strategy, your own rules is important. You have to personalise your trading to fit your personality.
It’s been said that stop-loss orders are there to take the emotion out of your trading. And this is true because setting up an automatic stop-loss order before you enter a trade can be an effective way to cut and exit a losing trade. Even when you’re not in front of the screen, having a stop-loss in place can save you a lot of money.
BG (not his real name) found out about the importance of using stop-loss orders in one of his trades. At that time he had 3 open positions. Confident that the price of the EUR/JPY will go up, he put a take-profit order but did not bother to put a stop-loss order.
Feeling happy and confident with the trade and expecting to take profit when his level was hit, he went to bed expecting to see profits the next morning.
But his expectation didn’t happen. Instead, his trade went down and his account was down 75% the next morning.
Like many other traders, BG said the experience taught him the importance of controlling one’s emotions - greed, excitement and overconfidence – which can affect your trading decisions.
A veteran trader with several decades of experience once told a new trader “I wish your first trade to be a loss”. While that is not the most encouraging and inspiring piece of advice to give to a budding trader, it carried a lot of important messages.
The fact is no trader wants to lose. But it is also a fact that losing trades can force traders to stop, think and analyse where they went wrong. It is the losing trades that can deliver the lessons to improve one’s trading.
In the case of 'John' (not his real name), the joy of getting into two winning trades when he was just a newbie set him up for overconfidence.
“I started trading without doing any research. I skipped the demo account as I was confident of getting into some winning trades,” he said as he recalled his mistake.
He placed two trades on the GBP/USD pair and it went in his favour. Naturally, he was happy with the result and it boosted his confidence all the more.
But when a trade went the other direction, he didn’t know what to do nor how to stop the losses. Not knowing anything about stop-loss orders, he didn’t do anything to cut his losses.
Instead, he put on more trades as the prices moved against him. In his mind, if he put more trades he would make more money when the prices turn in his favour.
“But prices didn’t turn in my favour. I held the trades for the day and I stayed glued watching the screen until my account was blown. That was a hard lesson for me,” he said.
This experience taught John the importance of reigning in his emotion of greed. It also honed in the fact that over-trading/revenge trading can be more costly.
But for him, the most important lesson was to learn from the mistake.
There is no doubt that the availability and accessibility of technology have made a lot of impact on trading. With new technology, traders now have access to interactive charts, automated indicators and even forex trading robots.
Today, even people who don’t know anything about trading or the markets can use Expert Advisors (EAs) to get into trading.
While EAs can be effective trading tools and some traders have used them successfully, EAs also have limitations.
RV (not his real name) learned about the downside of using and relying too much on EAs the hard way. He was only one week into trading when he discovered EAs. Thinking that it could be an effective tool to help with his trading, he bought an EA and followed the instructions of the EA developer.
As soon as he was set-up, he opened six trades using the EA. The initial trades delivered the expected positive results. The EA seemed to be doing what it was supposed to do. Confident and happy with the initial results, he left the EA running into the night.
But when he checked the trade a bit later, he saw his drawdown increasing rapidly. He started to panic. This was made worse as he saw the EA opening more trades that were going against him.
On top of that, technology failed him at a critical moment. His internet connection slowed down and he could not do anything to stop the trades.
After gathering his thoughts on what and how did it happened, he found out two things. One is that the terms and conditions of the EAs were not met. And there was also a big news event that night that impacted his trade.
New traders should not even think about placing a trade without having a trading plan in place. This trading sin is a big no-no for beginner traders.
Even if trading signals are available, new traders should refrain from trading without having a trading plan in place first. The saying “failing to plan is planning to fail” holds true here especially when it comes to trading the market.
A trading plan should include things such as goals, risk, strategy and trade management, and be unique to each trader. Sure, you can look at another trader's plan to see how they have set it up but the risk tolerance and the goals will be different for every person.
Traders who are driven by revenge trading do not care about the risks they take when placing a new trade. All they care about is wanting to make back what was lost and when they're in the wrong headspace this downward spiral can get out of control and the losses will stack up.
When you start to trade more frequently you should have a process in place where you take a short break if you either win a few trades in a row or lose a few trades in a row. This will help you understand patience in the financial markets and you'll be able to show discipline whether you are seeing profit or losing money.
A trading journal is separate from a trading plan, where the plan is followed to ensure you stay on track and practice proper risk management, while the journal is implemented for a trader to track how their trades are going.
This is quite a common practice with traders all over the world but can often be overlooked for new investors who are jumping into the market.
The main goal of journalling your trades is to track your trading performance by taking notes on each trade e.g. position size, instrument, and entry and exit points.
By keeping record of this information, you can later review and understand where things went well and where things went not so well.
When trading on leverage, new traders should not get too carried away and use the highest leverage possible on their trading account.
Leverage offers a unique opportunity allowing you to open a trade using only a small amount of your capital but gaining full expsoure to the trade. This is why leverage is often called the 'double edged sword', as it magnifies both potential profits and potential losses.
This is a common mistake with newer investors who are excited about the prospects of trading; this excitement can sometimes lead to them making poor decisions that they wouldn't usually make if they were calm and collected.
If you are going to use leverage then start off with the lowest leverage available and fully understand the consequences of using it.
Chances are you have been guilty of these trading sins at one time or another.
But given the tough lessons – capital losses, account wipeout, sleepless nights and stressful situations, it pays to read them over and over again to make sure you fully comprehend them.
Most importantly, the next step... trying not to make these mistakes again.
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.
An IB traditionally refers new traders to their preferred broker for a commission. Read more about how introducing brokers operate for Axi in this guide.