Learning to trade can be a fun and interesting process but all that information flooding towards you can all too often seem very daunting. The human brain has a fairly limited processing capacity (some more than others) and when you overload your brain it is easy to make mistakes. You might have heard of the phrase “to err is human…” but when your errors cost you serious money then no amount of philosophising will take the sting away entirely. 

Save yourself that pain and avoid making these 3 trading mistakes when you’re putting your hard-earned money at the mercy of the markets… 

1 – Not Cutting Your Losses

This might seem obvious but you’d be surprised how often this bites even experienced traders. Let’s say you put a short trade on and the market moves against you. You didn’t get out at the beginning and now the market is buoying ever upwards, taunting you. You double down. Now this is personal. Surely it has to go down soon. You’ll wait it out you say…but the trade doesn’t turn, the price keeps creeping up and the hole that you’ve dug yourself is getting bigger and bigger. A strategy caused you to enter into this trade but now any remnants of a plan are long gone; you are now trading purely on hope and you’re putting your entire account at risk.  

Hindsight is always 20/20 but if you’d gotten out of the trade when it initially went south on you and kept sticking to your backtested strategy, the odds are you would have recovered your losses already and be ready to take on new trades. By doubling down on a mistake, you remove your agency.  

If a trade goes against you, take yourself out of the trade. Getting your fingers burnt does not make you a bad trader, quite the opposite in fact, when the alternative is holding on and letting the flames potentially take all the profits of your previous trades. Your job as a trader is to correctly manage your risk; it is not being right every time. Although it is easier said than done, a key stumbling block for many traders, especially when starting out, is trying to remove emotions impacting upon their trading decisions. Cutting your losses might hurt your pride but your pride will definitely hurt your profits. 

2 – Don’t Buck The Trend For The Majority Of Your Trades

Ideally you want to trade with the trend 80% of the time and only swim upstream for 20% of them. It makes sense that when the markets are going up you should be going long and when they’re dropping like a rock that you should be shorting them. But what do you do in a sideways market? 

Our Pro-Trading System automatically tells us that the price is not trending, displaying a white histogram. The waters are far from calm when a market is stuck within the moving averages and, if you’re a trend trader, you need to be very cautious as your strategy is likely to come unstuck in these range bound conditions. 

Unless you have a range bound trading strategy in place, what you want to do is be patient and wait for price to breakout of the averages. The Pro-Trading System will show you this by changing colour, either green for long or red for short; in either case, CONGRATULATIONS, your patience has been rewarded and you now have a trend to work off of. When the market goes sideways, unless you have a specific strategy for trading in these conditions, often the best thing you can do is wait it out and either pause your trading entirely or head to another market you’re also familiar trading on.

3 – Don’t Jump On The Bandwagons 

Coming a close second to ‘Remember to keep breathing’, ’Avoid buying the highs’ ranks extremely highly in the rulebook of successful traders. Ask the man on the Clapham omnibus what he knows about trading and he’ll likely answer with a variation of ‘Buy Low, Sell High’.

Unless your brain is telling you YOLO or shouting ‘to the moon’ right now, you are probably wondering how it is you know when the stock price is at a high? Well, quite simply, you just need to look at where the price is currently and then go back on the chart from there to compare it to the last swing high. 

Let’s look at this example. 

Imagine that you were judging whether to enter a trade at the point in time circled above. In this moment, price is at a new high. Looking back at the previous swing, you can see that made a high and that this is a classic breakout area if you are a breakout trader. The majority of the time the market will reject the price and the move will fade back down. In the Forex markets there is a tendency for price to pull back before pushing higher, so why take the breakout? Be patient and wait; if you short the lows you’ll have to sit through the pullback before the market even starts to head in the direction of your trade.

Trading stocks is an entirely different beast as they can breakout and run hard, making buying breakout extremely viable, but you still need to spot the set-ups that have a high probability of being profitable. With Forex, this method will work on occasion, but the false feeling of confidence that the win will give you will ultimately end badly for your trades. Avoid buying the highs; if you’re trading a new market based on other retail traders causing it to hit the headlines, there’s strong odds that the moment of opportunity has long passed you by.

The Importance Of A Trading Education

Avoid making silly (and costly) trades. Find out why psychology, routine, personality, strategies, software and training are so incredibly important for being able to reliably make money from trading. Whether this is your first time taking on the forces of the market or you’ve had limited success and want to improve that potential, we have a course that’s right for you. If trading sounds interesting to you, then please remember to check out Learn To Trade Online; it’s a FREE one-day training course that we regularly hold and covers day trading, swing trading and many of the basic concepts. Are you ready to start your trading education? Good news! Registration is now open for our Pro-Trader Programme! Join now and learn how to generate a reliable second income that fits around your professional schedule or even turn trading into your full-time job. Click here for more information.  

Further Reading:

How To Read A Candlestick Chart

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Understanding Our Habits

Habits make up a significant proportion of everyone’s daily lives, often without us even realising it. Habits are quite simply patterns or behaviours repeated over time, day after day, until they become second-nature to our subconscious. It’s thought that our brains...

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