Let’s look into the most common mistakes that traders make, and you should avoid.
Changing your trading strategy after 5 losing trades in a row. Losing is unavoidable and even the best traders will regularly realize losses. Changing your approach after a few losing trades sets you back on the learning curve. Stick to your approach, every losing streak will end.
Another mistake a trader do is not expecting the unexpected - Anything can happen in the market.
A sudden market collapse, an unexpected news release or the loss of your internet connection can happen at any minute. Get yourself ready for everything. If a single trade could wipe out your trading account, you have not done your homework as a trader.
Not keeping track of relevant news releases – denying the importance of news
Even if you are a purely technical trader, you do not have to trade the news, but you have to be aware of them at any point in time.
Not being prepared can be a big mistake while doing trading.
Do you just fire up your computer, start your trading software and dive into the charts? Just like a plane pilot doesn’t just ask his co-pilot after the take-off where they are heading, a trader needs to have a detailed trading plan for the upcoming trading session.
Not doing a post-trading analysis
What you do after your trading session is over determines your future success as a trader. The professional traders analyze their trades, crunch data and plan for the next day. Post-trade analysis requires you to mark your trades with the specific date on which you purchased an investment. You should know if particular events on the said day affected your investments in one way or another. It is a critical aspect of post-trade analysis.
Failing to adapt to changing markets. Once you find a way to consistently make money trading, the work does not end. Financial markets are ever changing and evolving organisms. If you fail to adapt to changing market conditions, you will be out of business shortly after.
Letting hindsight influence your trading. Amateur traders watch a trade after they have exited it and beat themselves up if they have entered too early. Other times they try to find reasons why a trade was a loser to change their whole trading approach on the spot. The professional trader collects data and makes educated trading decisions based on a large enough sample size.
Believing in price forecasts. “If someone knew that the price will go to $40 tomorrow, it would go to $40 today.” It is impossible to predict where price is going to go in the future. Because of the numbers of traders, economists or so-called ‘trading gurus’ and the amount of forecasts, you will always find a handful of people that guessed right. Don’t blindly follow someone who was plain lucky.
You use the words casino, boring, firework, killing it to describe your trading day.
Markets go up and they go down, sometimes they move fast and sometimes a little bit slower, but it is the nature of how financial markets behave. However, if you are trading because of a thrill and excitement, you won’t last long in this business. Adopt a professional mindset and use appropriate language to avoid emotional trading.
You use absolute words like never and always to talk about what is going to happen.
Using absolute terms in trading is a very dangerous thing to do, always! If you have seen that a certain setup has worked 100% out of the last 20 times, it can very easily fail when it occurs the next time. And just because you have never seen prices going sharply against you, it is still not an excuse to not use a stop loss order or take a bigger position.
Using the words ‘hope”, “wish” or ‘feel’ when talking about a trade.
If you hear yourself saying or thinking that you hope or wish that price is behaving in a certain way, exit your trade immediately and do not trade any further. Traders have to rely on hard facts and trade based on actual statistics of proven methods. Trading based on emotions is a major reason why retail traders fail consistently.
Make sure you have checked three things before you start trading:
1) You are calm
2) You had a good night’s sleep
3) You are up for a challenge
If you keep watching your floating profit and loss, you are doing mistake.
While being in a trade, do not watch your account go up and down with every tick. It may result in emotional trading decisions.
Thinking about what you can do with the current profit or what you could have done with the loss you could take.
Only risk what you are can lose comfortably. Trading too big results in trading decisions that are based on fear and greed, the two biggest enemies of traders. On the other hand, trading too small makes you sloppy and more likely to abandon trading rules and risk management.
Not paying attention to correlations and how they increase your risk
Financial markets are highly correlated. Traders often believe that by taking several trades in different instruments they are diversifying and lowering their risk. What these traders don’t realize is that, especially if your trading instruments are somehow related, they often move in sync and instead of decreasing your risk, you are actually increasing it.
This is a big no-go! Learn to take losses because they are normal. Trying to delay the realization of losses is the death sentence for your trading account.
Not having a trade checklist
Especially for beginning traders, having a checklist that you go through before you enter a trade can significantly increase your performance. A checklist can keep you out of trades that do not match your criteria and increase your discipline easily.
The trading industry created the illusion that with enough leverage, the right trading strategy and some luck you can make a lot of money easily. However, even after years of losing money month after month, ‘traders’ still believe that the only reason they have not become a millionaire is because they haven’t found the right strategy yet. Wake up!
Not treating trading like a business
Trading is not necessarily hard or difficult, but the approach of the average trader makes it impossible to earn profits from trading. Testing different ideas, calculating and analyzing data, tweaking, continuous self-improvement, preparation, journaling and discipline are all the things the regular trader does not want to hear about and that is exactly why more than 99% of all traders will never make money.
Believing that price cannot move higher/lower
Even when price has been in a prolonged rally for several months, you will always find traders who week after week tell you that the turn is imminent and they are looking for short entries. Traders would do well to focus on what is obvious and join the trend as long as it is possible.
Trading your own money and savings after 3 months of demo trading
Even people who have been to college or university and who spend years to prepare for a job and then worked their way up are among those traders that open a demo account, take some random trades and then after 3 months of mixed results start trading their own savings. The possibilities that trading offers are limitless and can blind people, but the pitfalls are just as big and the next margin-call is just one click away.
Cursing Indicators while praising candlesticks
Whether you are trading price action or are a follower of indicator-based trading strategies, it does not make a difference to your chance of success as a trader. Although people will tell you otherwise, the strategy you choose has no impact on your trading success. It comes down to how you apply the strategy, tweak the parameters and manage yourself as a trader.
Analyzing your performance on a daily basis
Do not try to be profitable every single day, week or month. Trading is a long term activity and you do not have any influence on the outcome of your trades. Your only responsibility as a trader is to find a method that has a positive expectancy, religiously apply it and constantly monitor every little aspect of your performance. Do not try to force winning trades, the markets will show you who the boss is.
Following advice from random people
Never ever take trades based on opinions, tweets or promises made by other people. “Give a man a fish, and you feed him for a day; show him how to catch fish, and you feed him for a lifetime.”
Keeping records is a key to being successful at trading.
If you win a trade, you should note down the efforts and the reasons that pulled you towards the trade. If you lose a trade, you should keep a record of why that happened in order to avoid making the same mistakes in the future.
Make a note of all details such as targets, the exit and entry of each trade, the time, support and resistance levels, daily opening range, market open and close for the day and record comments about why you made the trade and lessons learned.
You should save your trading records so that you can go back and analyze the profit or loss for a particular system, draw-downs (which are amounts lost per trade using a trading system), average time per trade (in order to calculate trade efficiency) and other important factors. Remember, this is a serious business and you are the accountant.
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