1. No Trade Plan
During my Training Classes more than 90% of the traders that I come in contact with have no trade plan. They do not know what to do if they are wrong and they do not know what to do if they are right. Most of them are gambling not trading. Trading Plan is OXYGEN for a trader and benefits are immense.
Typical Trade Plan will be as below
• Know how and where you are going to enter a the trade.
• Know how much money you are going to risk on the trade.
• Know how and where you are going to get out if you are wrong.
• Know how and where you are going to take profits if you are right.
• Know how much money you are going to make if you are right.
• Have a protective stop loss in case the market does the unexpected.
• Have an approximate idea of when a market should meet your objective; when it should begin to make a move, and if it has not done so, get out!
2. No Money Management
Most of Retails traders have no concept of money management. Most of traders will talk about How much leverage there broker will provide but will never focus on what if things go Wrong Money management is controlling your risk through the use of stops, while balancing your potential for profit against your potential for loss.
You should have a proper Win/Lose Ratio and Risk/Reward Ratio
Win/Lose Ratio
Nobody wins all of the time, the win/lose ratio is usually expressed as a percentage (e.g. if you win 66 trades out of every 100 then you will have a win% of 66% and a losing% of 34%. This expressed as a ratio is 66/34 = 1.941:1.) You do not have to make 100 trades to calculate this; all that you need to know is the number of winning trades and the total number of trades made.
- For example you have made 37 trades in total and you have won on 21 occasions, therefore you must have 16 losers (37-21). The win/lose ratio is 21/16 = 1.3125:1, the win% is 21/37 = 56.76%. The losing% is 16/37 = 43.24%.
Risk/Reward Ratio
- Calculating reward is simple it is just the average number of points won per trade, so if you have made 37 trades, of which 21 won a total of 252 points your average win (reward) is 252/21 = 12 points. Risk is just the average number of points lost, over the same 37 trades you must have had 16 losers and had a total loss of 128 points your average loss (risk) per trade is 128/16 = 8 points. The risk/reward ratio is simply 8:12 or 1:1.5
3. Not Using Stop Loss Orders
The most obvious excuse for not putting SL is Market will trigger my SL and than go in my favour. Do you remember what happened to Sun Pharma/Divis Labs/Lupin in last few months Stock just crashed more than 20% in single session wiping off many traders. Recently the election Dip came on 20 Morning, Traders who have shorted would have lost good money if SL is not kept as seen in below chart.
This fits right in with a trade plan and money management. It is the failure to use stop orders once you enter a trade — not mental stops, but real stops that cannot be removed. Most of traders use mental stops because in the past they have been stopped out and then watched the market move in their direction.
How many times have you had a mental stop then tried to make a decision whether or not to take a loss? Typically, by the time you make the decision, the looses generally increased many fold. There is an old saying that the first loss is the smallest. It is also the easiest to take, even though it may seem hard at the time.
SL is MUST Your goal is not to make money but to protect your capital
4. Averaging a Loss.
In F&O Trading , with 10:1 or greater margin, averaging a loss can be disastrous to say the least. A typical approach is that after you have went long and it drops lower, you might figure that since it was a good buy then, it is a better buy now. You may justify averaging down by figuring you will have a lower average entry price and require a smaller move to break even. Unfortunately, you will lose twice as much if the market continues against you, as it almost always does. As seen in above chart more your loss increase difficult for it to recover.