Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process. That’s why you should be prepared to expect them and if possible not make them. Easier said than done you would say and you will be completely right. That is why I have compiled that list of trading mistakes that you should be trying to avoid. Real life trading will show you how “easy” that could be.
Trading without having a predefined trading plan
Trading plans should act as a blueprint during your time on the markets. They should contain a strategy, time commitments and the amount of capital that you are willing to invest.
After a bad day on the markets, traders could be tempted to scrap their plan. This is a mistake, because a trading plan should be the foundation for any new position. A bad trading day doesn’t mean that a plan is flawed, it simply means that the markets weren’t moving in the anticipated direction during that particular time period.
One way to keep a record of what worked and didn’t work for you is to have a trading diary. This would contain your successful and unsuccessful trades and the reasons why they were so. This can help you learn from your mistakes and make more informed decisions in the future.
Sticking to the Plan
Novice traders often report that they have difficulty sticking with their trading plan. There are many possible reasons. A common issue is not having a clearly defined plan. When a trading plan is not clearly defined, it is hard to follow and easy to abandon. When you trade by the seat of your pants, even just a little bit, you can panic at the wrong moment.
You may be prone to over-thinking your plan or you may become easily consumed with self-doubt. When you clearly define a plan, in contrast, you can implement it more automatically. You can enter and exit more effortlessly. Many novice traders say, however, that even when they painstakingly delineate a trading plan, they still have difficulty following it. Depending on your personality, you may or may not have difficulty maintaining control and discipline.
Watching the market too closely, too often
Watching a screen, observing every small movement all day can be damaging to both your financial and psychological health.
You might end up making many small trades out of impulse and anxiety.
As a Trader, you must give the stocks sufficient room to “breathe”.
The first is that a losing position is held which proves costly not only in terms of time, but also effort and money.
For instance, for a 50% loss sustained, a 100% gain has to be made to even things out. Averaging down in such a situation can lead to massive losses or margin calls. This is because trends can stay put even when traders are liquid-more so if capital is being added as the position moves out of winning gains.
Taking a position before a news announcement can harm a trader’s chance of success. There is no easy money…it’s all about working hard and thinking smart.
Trying to get even or being too impatient
Patience in trading eventually pays off as it allows you to sit back a bit and wait for the right trading setup. Most traders are too eager to jump in and trade whenever any opportunity arises. This is probably due to our human nature and the eagerness to make a “quick buck”. But if there is one thing that ensures a high probability of winning, it is having the patience to grasp all the necessary information before you trade. This apparently will take time as there are many factors involved in it, such as the forming of trends, trend corrections, highs and lows. Impatience to look at these matters could result in loss of money. It could be helpful sometimes to take a break, allow oneself to have the time to look at the bigger picture, instead of focusing too much on one aspect. Remember that a single transaction might resonate in a series of future losses if executed at the wrong moment. It takes time and patience to wait for the market correction, before you commit to a trade.
Wait patiently for the best opportunities to align themselves and then act mercilessly.
Trading Against the trend
“The trend is my friend“- another cliche sentence, which has helped me stay on the right side of the market for as long as I am a trader. If you think about trading the way I do, it could be a boring business, but at least one that makes money. I am not really interested in quick returns. I am not interested in penny stocks. I am not interested in the most popular trades that everyone is talking about. I like to do my own analysis. The more boring a trade looks, the better for me the trade is. Always consider the trend before placing the trade!
Having a bullish/bearish bias
Folk wisdom says that if you throw a frog in a boiling water, it will promptly jump out of it. But if you put the frog in lukewarm water and then slowly heat the water, by the time the frog realizes that the water has become boiling, it will already be too late. Studies of decision making have proven that people are more likely to accept ethical lapses when they occur in several small steps than when they occur in one large leap. This statement also explains nicely the unfortunate process of unprofitable trading. Once you are in a losing position, you don’t realise if it slowly accumulates into a big loss. You have your own bias and it might lead you into obscurity. That is why one of the most important elements of successful trading is objectivity. It is also one of the hardest elements of mastering the field of trading. Inattentional blindness is definitely not helpful to the human psychology and when it comes to trading, it could be detrimental.
Focusing on profits without managing risk
This might sound counter-intuitive but trading is about managing your risk, not focusing on profits. Without proper risk management, greed will get the better of any trader.
Focus on becoming a good trader and the profits will come naturally. It’s an obvious fact that most traders overlook when they’re blinded by the eagerness to make money.
Manage your risk well, cut losses, and minimise losing trades. Rinse and repeat.
There is no way to guarantee that a trade will return profits. This is the actual beauty of trading and being consistent is based on a trader’s skill set and his/her eagerness to improve. Keep in mind winning without losing does not exist in the world of trading. Professional traders know that the odds are in their favour before entering a trade. It is a continuous process of making more profits and cutting down loses which might not ensure a win every time, but it wins the war. Traders or investors who don’t believe in this adage are more viable to making loses.
Traders who win consistently treat trading as a business. While it’s not a guarantee that you will make money, having a plan is crucial if you want to become consistently successful and survive in the trading battle.