Traders generally buy and sell securities frequently and hold positions for periods that are much shorter than investors. Such frequent trading and shorter holding periods can result in trading mistakes that may wipe out a new trader’s investing capital quickly.
One of the defining characteristics of successful traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, get paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may hold on to a losing position in the hope that the trade will eventually work out. Such inaction may result in severe depletion of capital and mounting losses in addition to tying up trading capital for an inordinate period of time in a losing trade or trading mistakes.
Failure to Implement Stop-Loss Orders
Stop-loss orders are crucial for trading success, and failure to implement them is one of the worst mistakes that can be made by a novice trader. Tight stop losses generally ensure that losses are capped before they become sizeable. This risk is outweighed by the benefits of such orders while there is a risk that a stop order on long positions might be implemented at levels well below those specified if the security gaps lower. A corollary to this common trading mistakes is when a trader cancels a stop order on a losing trade because he/she believes the security is getting to a point where it is going to reverse course imminently and enable the trade to be successful just before it can be triggered.
Not Having a Trading Plan or Sticking to One
Experienced traders get into a trade with a well- defined plan. They know their exact entry and exit points, the amount of capital to be invested in the trade, and the maximum loss they are willing to take, etc. Beginner traders may be unlikely to have a trading plan in place before they commence trading. If things are not going their way even if they have a plan, they may be more vulnerable to abandon it than seasoned traders. Or they might reverse course altogether (for example, going shortly after initially buying a security as it is declining in price), only to end up getting “whipsawed.”
Averaging Down (or Up) to Redeem a Losing Position
Averaging down on a long position in a blue-chip may work for an investor who has a long investment time horizon, but it could be fraught with peril for a trader who is trading volatile and riskier securities. Some of the biggest trading losses in history have occurred because a trader kept adding to a losing position, and was eventually forced to cut the entire position when the magnitude of the loss made it untenable to hold on to the position (or alternatively, because his bosses discovered the true extent of the trading loss). Traders also go short more often than conservative investors, and “averaging up” since the security is advancing rather than declining is an equally risky move that is another common trading mistakes made by the novice trader.
According to a well- known investment cliché, leverage is a double-edged sword, because it exacerbates losses on losing trades and can boost returns for profitable trades. Beginner traders may get dazzled by the degree of leverage they possess, especially in forex trading, but may soon discover that excessive leverage can destroy trading capital in a flash. If leverage of 50:1 is employed – which isn’t uncommon in retail forex trading – all it takes is a 2% adverse move to wipe out one’s capital.
Changing Your Trading Strategy after 5 Losing Trades in a Row
Losing is unavoidable and even the best traders will realize losses. Changing your approach after a number of losing trades set you back on the learning curve. Stick to your approach, every losing streak will end.
Not Expecting the Unexpected
An unexpected news release, a sudden market collapse or the loss of your internet connection can happen at any minute. Be prepared by having a fixed stop loss in place. If your trading account could be wiped out by a single trade, you’ve not done your homework as a trader.
Not Being Prepared
Do you start your trading software by just firing up your computer and diving into the charts? Just like a plane pilot doesn’t ask his co-pilot following the take-off where they’re heading, a trader needs to have a detailed trading plan for the upcoming trading session. If not, this will result in trading mistakes.
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 the plan for the next day, crunch data, and their trades.
Lack of Record Keeping
A detailed record of your trading can have many benefits. It can show where you went right in the past, and where you went wrong. Yet most traders fail to take advantage of these learning opportunities.
Consider the value of being able to look back at previous experiences, having noted even how you felt about coming out of the trade and placing, and what happened in the market, what trades you placed, what your profit/loss was.
A trading log or diary can be an immensely powerful tool. Also, it’s one of the most common and costly mistakes to neglect it.
New traders often wait for confirmation if they’re right before they enter a position. That hesitation causes them to miss planned entry points and, if they’re right, can end up forcing them into buying at a stock price that’s higher than they intended when an upward trend is expected or selling at a lower price than they intended when a downward trend is expected.
Deviating from the Plan
Creating a trading plan is important, but it’s not worth anything if you constantly deviate from the course you have plotted for yourself.
You might be tempted to go in heavy on one trade or stay in a little longer on another, and to ignore your trading plan. But in the event you actually take the time to develop your trading plan then you should have faith that is the best-suited approach for you.
Even the best trading plan remains the better the guide, and the better you stick to it, the better success you will have in the long run.
Strategy Doesn’t Match Your Outlook
An important component when beginning to trade options is the ability to develop an outlook for what you believe could happen. A number of the common starting points for developing an outlook are using fundamental analysis, technical analysis, or a combination of both. Technical analysis revolves around interpreting market action (mainly volume and price) on a chart and looking for areas of support, resistance, and/or trends in order to identify potential buy/sell opportunities. Fundamental analysis includes reviewing a company’s financial statements, performance data, and current business trends to formulate an outlook on the company’s value. An outlook not only consists of a directional bias, but it encompasses a timeframe for how long you believe your idea will take to work.
Bottom Line for Trading Mistakes
Trading can be a profitable endeavor, as long as the trading mistakes mentioned above can be avoided. While traders of all stripes are guilty of these mistakes from time to time, beginner traders should be especially wary of making them, as their capacity and capability to bounce back from a severe trading setback is likely to be much more restricted than experienced traders.