5 Trading Mistakes to Avoid
This week we offer our top tips on how to avoid the five most common trading mistakes.
1) Holding On To Losing Positions
We all have fragile egos and no one likes to be wrong, but holding on to a losing position (in the hope that the trade is eventually going to turn around and go into profit) can be very costly. If you don’t have a stop loss in place, your broker could even make a margin call. And if you ignore your broker’s warning, they might even bring you out of the trade and close your position so that your losses can’t exceed the deposit in your account.
HOW TO AVOID THIS MISTAKE
From an intra-day perspective, you must exit bad trades quickly. Always have a clear point on the chart where you will accept that you were wrong. At this point, close out, cut your losses and move on. Swallow the bitter pill and move on to better opportunities!
2) Revenge Trading
Again, this mistake is driven by our fragile egos. Losing money can make us angry. But aggressively trying to recoup losses usually only leads to further losses. When we get angry, our emotions cloud our judgment. We must accept that losing is part of trading. Statistics dictate that you will lose some trades, so don’t get upset about it. When you lose trades, use the experience to inform your strategy going forward. When you feel angry about a loss, use that adrenaline to motivate you to learn. Focus on what you did wrong and use that to develop your current system.
HOW TO AVOID THIS MISTAKE:
Know when to stop digging! Accept you lost. Focus on what went wrong and what you can learn from it. Control those emotions; channel them into something more positive, like learning what not to do next time. Use your disappointing experiences to develop and improve your trading plan.
3) Taking Excessive Risk
Excessive risk does not necessarily mean excessive return. People think risking large amounts will lead to the most profit, but the opposite is true. All traders who risk large amounts on a single trade will eventually lose. The law of averages dictates this. If you lose 50% of your account, you have to gain 100% to break even. It only takes one loss on a single trade that you’ve risked too much on and you could be wiped out. People also take excessive risk by not using stop losses, thinking that, if a trade goes down it will eventually come up again. Professional traders always use stop losses and typically only risk 1% or less of their trading account on any single trade. This is the least stressful way to trade. The more you risk, the more stress you carry. Nothing good comes from taking excessive risk!
HOW TO AVOID THIS MISTAKE:
Never risk more than 3% of your capital on any one trade and always use stop loss orders.
4) Entering Positions Just Before News Announcements
As technical analysis traders we don’t base our trading decisions on news announcements, we only trade what we see on our charts. We can never predict how the market is going to react. For example, sometimes “positive” news is not quite positive enough and the market reacts negatively. There can also be additional statements and forward-looking announcements after the initial news item. Any news announcement can cause a surge in volatility, or “whipsaws”, where pools of orders are hit, causing volatility.
HOW TO AVOID THIS MISTAKE:
Always check the Forex Factory calendar for scheduled news announcements and stay out of the market while that news is being announced. Wait to see how the market reacts. We react to how the market reacts, not to the news itself.
5) Having Unrealistic Expectations
No one can jump into trading and be profitable straight away, so don’t expect to be any different. The market doesn’t care what you want. The market is complex and chaotic, and it takes time to find a system/strategy that works. When you find one that does, stick to it and improve it, don’t jump ship to some other strategy thinking you’ll achieve perfection. Remember, losing is part of trading; you must manage your expectations or you will fall into all the traps we’ve mentioned here.
HOW TO AVOID THIS MISTAKE:
Have a trading plan with realistic goals, and when you reach them, keep going. Stick with the plan and refine it, don’t throw it out and start a new one in the hope that it will magically produce massively different results.
Remember, it takes hard work, dedication and (above all) the right education to become a successful trader. This is true for everyone; don’t assume you can avoid it!