With the term trading comes a range of preconceived ideas about how it works and the validity of its money-making ability. Many people believe trading is a quick way to boost income, others, believe that it’s too involved or complicated.
The internet, however, has seen a wealth of information become available to everyone and that in turn has had its own effect on trading. When people take what they read as fact, or trust random sources online, disaster can strike, trading isn’t usually a way to make quick money.
There are of course, online sources that want the best for their audience, however ultimately it comes down to experience and knowledge. This success will come from learning from professionals, such as those at Learn to Trade, who offer seminars, courses and eBooks to provide strategies and the understanding you need to succeed. Often the most successful traders know how to avoid mistakes, rather than make hugely profitable trades. With all that said, here’s the 7 most common trading mistakes and how to avoid them.
Mounting losses
One of the most obvious and biggest trading mistakes you can make is letting your losses mount. Many new traders fall into the trap of ‘riding the wave’ and hoping their trade will eventually work out. Successful traders know when to exit and will cap a small loss and move on to their next trade quickly. Letting your losses mount is a sure way to see your capital begin shrinking.
Experienced traders will implement a stop-loss order on their trades to ensure their loss on a position is limited.
Not sticking to a trading plan
Before getting into a trade, it’s crucial that you have a trading plan. Not having one, or not sticking by it will put you at increased risk for a loss. Your entry and exit points, the amount of capital invested and the maximum loss you’re willing to take should all be considered. Having a plan and sticking to it will generally see the most success.
Trading multiple markets
Many beginner traders can jump from market to market, hoping to find the best, easiest or most promising trade. All this will achieve is a distraction. As a novice trader, you should be using all your time to learn and experience a single market. Understanding how a market works is the best way to make successful trades.
Overconfidence
Overconfidence can come from a profitable trade, external influences or simply just a person’s personality. Unfortunately, hubris can cause damage as it will lead a trader to be complacent or encourage them to take dangerous risks. Again, trading isn’t a way to easy money, it takes time, research and experience.
Not researching
Before a trade is initiated, research is important, especially for new traders. Without experience, the only way to understand seasonal trends, trading patterns and data releases is to conduct research. This generally happens when a trader is too anxious to make a trade and jumps at the opportunity, which can lead to an expensive mistake.
Trading too much
Trading too frequently might be an effort to increase profits, but in reality, it’s more likely to return only losses. Profits should more often be saved rather then immediately reinvested. Where seasoned traders know this from experience, most new traders don’t fully understand how frequent trading can turn profits into losses.
Pack mentality
The pack mentality, where traders blindly follow what the majority is doing, can be a dangerous situation for a trader. Simply following the herd will see new traders pay too much as the price raises due to a stocks popularity. While it’s often true that the trend is your friend, experienced traders know when to exit a trade, or when to lead the way. New traders simply lack the knowledge of when to make the right actions.
These mistakes are some of the most common and easy to make errors in trading. Most of the time, these mistakes come down to a lack of knowledge, wrongly placed trust, or a simple lack of experience. Because of this, the best way to approach trading for novices is to learn from experienced traders and take on the advice of professional trading coaches.