Trading seems so simple. After all, a price can only go up or down so all you have to do is pick the right direction then sit back and wait for the money to roll in, right? Well, not quite.
The trading world can be full of surprises for those who have big ideas but little in the way of preparation. When ill-prepared you won't recognise that trading mistakes are all a part of the learning process and can actually shape you into becoming a successful trader.
Legendary Wall Street trader Martin Schwartz shared both the lows and highs of his stellar trading career in his book 'Pit Bull: Lessons from Wall Street's Champion Day Trader'. 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 brand new to trading. He details how he learned and corrected those mistakes, and from then on the rest was 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 common trading mistakes.
Some of these 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.
To better help both new and experienced traders, we've put together a list of some of the most common trading mistakes:
Do you have a trading plan? If not, it’s time to get one and the best place to start is by thinking about why you’re trading.
Is it because you want to earn a bit of extra money on the side of your regular job? Do you want to make it a career? Is it just something you’re doing for a challenge? Whatever the reason may be, your goals will help dictate the way you trade.
Think about what you really want to get from trading then work out how you’re going to get it. Consider the amount of time you’re able to dedicate to trading, the types of trades you want to pursue (e.g. high volume, low profit), and whether your level of knowledge is sufficient or whether you need to spend time educating yourself.
Due to the potential to earn money from trading the temptation, especially for new traders, is to push limits in the hope of getting greater profits quicker.
But going into trades too enthusiastically - either in volume or value - only serves to raise your level of risk. If you overreach and things go against you, you might bounce yourself out of the market before you’ve even had a chance to settle in. Too many people enter the trading markets with the idea that it’s going to set them on a fast path to millions.
The reality is that trading isn’t the kind of thing where you casually throw in a bit of money and get untold riches in return - it takes a lot of skill and patience to get anywhere near those lofty heights.
Build slowly and steadily. Test things out with a demo account first, then once you open a live trading account with real money, invest a small amount and trade in one or two markets to get a feel for things. There is money to be made from forex markets, indices and commodities, but it rarely gets made on a handful of quick trades.
The more time you’re able to dedicate to trading, the better you’ll become, the easier you'll find it and the more opportunities to earn will show themselves.
We’ve all experienced that feeling when you’re on a good run and feel like you can’t do anything wrong. When you apply that to trading, it’s generally when you experience a sequence of profitable trades and you feel like you’ve mastered it. But all good runs eventually come to an end and it’s crucial to remember this because, ultimately, it’s your money at stake.
It’s good to be excited about trading and confidence is always a welcome characteristic, but don’t let emotion dictate your trading behaviour and push you into positions you wouldn’t normally take.
Try to temper your emotions. Before launching into a trade, take half a step back and try to look at it objectively. Does it fit with your strategy? Are you doing it based on sound information or just a gut feeling? How would you react if the trade went against you?
Come up with a system of cues that will help you protect yourself from too much emotional investment.
If you enter into a trade without doing any preparation, you’re not really a trader.
In fact, trading without putting any effort towards education or understanding how the markets work is more like walking into a casino, throwing some money on the roulette table and hoping for the best. While it’s true that there’s an element of unpredictability and volatility inherent to trading, by spending time learning and observing how the market works you’ll form an idea about the types of trades best suited to you.
Educate yourself and be prepared before every trade. Axi offer a wealth of educational content in whatever format you prefer: videos, courses, blogs, eBooks, webinars, and more. Take what you learn and apply it in your demo trading account where you can practice with no risk before moving into the real environment.
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 in 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. Just remember that soft stop-loss levels are more suitable for advanced traders that have experience in these markets.
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 decrease your trading capital.
And it may also take a big psychological toll on you as a trader.
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 and high risk, 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 other trading opportunities arise.
When you have a clearly defined trading strategy, filtering through the trade opportunities that become available and picking the best ones will be a little easier.
The ability to use leverage is one of the main attractions to the markets like forex trading, oil trading, indices, precious metals and cryptocurrency CFDs. Leverage allows you to trade a much bigger position even with a smaller amount of 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 wipeout 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 works, 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 10:1, 50:1; 100:1; 200:1 or 400:1 depending on your jurisdiction – it doesn’t mean you have to use the highest level possible.
As the saying goes, you need to walk first before you can run.
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 good potential or not.
So, the best thing you can do about revenge trading is not to get involved with it at all.
If you have a losing trade or a string of losses, it is better to step back and 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 costs.
If you're making this mistake, you're not alone. Even the big guns are guilty of this common trading mistake.
How many times have you perfectly timed your entry, seen a nice paper profit, only to see it vaporised by a sharp reversal? I'm going to bet more than once.
Letting a good trade go bad is the first major mistake you can make trading the financial markets, but there is light at the end of the tunnel.
The best way to correct this mistake is planning. You should know when you are going to exit before you enter into the trade. And you should have multiple reasons to exit.
Develop a variety of exit rules that allow you to achieve your objective from the trade – even if it does not go exactly as you might have hoped. You can have a combination of:
You can also scale out of your trade. Take a bit of your position off when the market makes some available, take a bit more as the move progresses, and leave some on for the big wins. This type of approach will help you to smooth out your equity curve.
Using a trading journal is a very critical part of becoming a successful trader. It isn't as simple as recording your entry and exits for profitable trades, it requires a bit more information and attention.
Your trading journal should include all trades, good, bad and even the really bad ones.
Some types of information that should be recorded in a trading journal include:
By having a trade journal available to you, you're able to go back and review your successful trades and trades that weren't so successful to highlight opportunities in your trading strategy where you can improve.
Investing without a time horizon in mind can set you up for failure. This is because all investments are either long-term or short-term, and they will have different rates of return depending on the length of your investment.
For example, stocks that perform well over long periods but not so much during shorter ones may make sense to hold onto when considering retirement savings.
When you understand your time horizon, you can better match the right investments to your portfolio.
Many traders are under the impression that they can't make mistakes like investment professionals, but this is simply not true.
If you jumped into a trade without doing your due diligence or you're a long-time earner and your portfolio has suddenly taken a dive, it's important to accept what happened and move on instead of letting your pride control your trading style, and hold onto those losers longer.
There is always going to be another day and another trading opportunity. Learn from those previous losses to continue improving your skillset on the way to becoming a successful trader.
Following the crowd is a common trading mistake where inexperienced traders blindly follow the herd mentality, finding themselves in detrimental trades.
It's important for novice traders to think about their own trading style when making decisions so that they don't jump into trends without conducting their own research and without understanding why it might work out better for them. If you enter into a trade by following someone else without performing any technical or fundamental analysis and a trade loses, you only have yourself to blame.
Inexperienced traders may jump from market to market - from forex to indices and cryptocurrency to commodities. This is a common mistake and it can lead to over-trading and significant losses.
Getting a better understanding of a market is important for traders of all levels so that trading decisions are based on facts instead of gut feelings or emotions. Before branching out it is wise to come to grips with one market and gain valuable trading experience before jumping into multiple markets at once.
Trading is a difficult process, and it often takes some time to figure out what works for you. However, if you can avoid these common trading mistakes when starting your journey in the financial markets, then the learning curve will be much smoother.
It’s important not only that we understand our own biases but also how they play into the way we trade so that we have an opportunity to manage them accordingly. All of this information has been highlighted in order to give traders more insights about common pitfalls so that they may steer clear of them going forward.
Remember trading mistakes are a part of the journey and you won't be able to avoid them all. From those mistakes comes lessons, use them to better yourself and be one step closer to becoming a great trader.
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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The trading journal is one of the most underrated tools in the world of trading. The task of keeping such a journal can seem tedious in the beginning, and most traders lack the patience and discipline to update it frequently.