A quality among all consistently successful traders is eliminating mistakes.
Mistakes can be expensive and emotionally damaging.
No matter how long you’ve been trading in the financial markets, you’re bound to experience lapses in discipline. To help lessen the impact, here are five common trading mistakes beginner traders, and sometimes experienced traders, make and solutions to avoid them:
1. Lack of a Trading Plan
“Failing to plan is planning to fail"
This modern-day proverb is widely attributed to Alan Lakein, the writer of several self-help books on time management from the 1970s onward.
Many traders fail because they do not have a plan. This is a common mistake novice trader often make and may help explain why so many fail to reach their goals in this business. These are rules of engagement and should be clearly defined for each move made in the markets.
A trading plan is a road map – a systematic approach designed to keep you trading from an objective standpoint. It should cover everything you need to trade, such as risk management, money management, defined entry, and risk parameters.
Solution: Spend time creating and testing a trading plan. It is the only way to gain the confidence to trade successfully and objectively.
Overtrading, also known as churning, is excessive buying and selling in the market, a mistake has often seen among shorter-term traders. In other words, it’s the execution of too many trades.
Overtrading is generally committed by those who have no trading plan – essentially no rules to adhere to. However, overtrading can occur for several reasons, such as boredom, the need to make money, and enthusiasm.
Solution: To help avoid falling victim to overtrading, following a well-defined trading plan that’s been subjected to rigorous backtesting will help. Essentially, your trading plan informs you of what to look for and when to act. This is particularly important for newer traders. Trade according to a tested trading plan, it’s your road map to success.
3. Not Using a Protective Stop-Loss Order
Employing the use of a protective stop-loss order is an integral part of successful trading in the forex markets; it’s vital for risk management.
Most traders overlook the fact they can lose on any given trade, and become complacent by not setting a protective stop-loss order. This is a mistake.
If you accept the possibility of loss, nevertheless, you would not trade without the use of a protective stop-loss order.
Not controlling risk is a mistake you’ll not want to make too often.
Solution: Learn to accept losing trades and use protective stop-loss orders. Without it, you’re exposed to exaggerated losses, leading to a potential margin call. This can take months to recover from psychologically, with some even throwing in the towel.
4. Not Capping Losses
Letting losing trades run is a mistake much newer, and also some experienced traders make.
Many of us dislike being wrong. Couple this with losing money, and we’re often bombarded with a whirlwind of emotion most of us are not accustomed to on a regular basis.
Traders search for reasons to justify staying in a losing trade, despite signs (your trading strategy) suggesting liquidation. It’s emotionally exhausting. Perhaps the hesitation to accept a losing trade stems from admitting defeat.
It’s always better to lose 2% than 10%. The emotional damage caused by a large loss can take months to recover from.
Solution: The key is to set defined protective stop-loss levels and not deviate. You make this decision prior to pulling the trigger; therefore, you’re not as emotionally charged as you will often be during a trade.
5. Lack of Education
Would you perform heart surgery without a five-year degree in medicine and core surgical training in a hospital?
Trading is just like any other career. Unless you educate yourself, to start trading with live funds is disastrous.
There’s a myriad of trading educators littered across the internet – some knowledgeable, some not so.
Solution: Check out our dedicated education section. We have eBooks, video tutorials, and trading knowledge available. This provides a great foundation to develop as a trader. In addition, we have several daily and weekly reports here and here, covering several financial instruments you may find useful.
6. Analysis Paralysis
Analysis paralysis affects many traders and is best defined as information overload, usually caused by a weak trading plan – without defined rules, or lack of. It could also be the case in which a trader lacks the discipline to follow a well-defined trading plan, affecting the ability to engage with the market from an objective standpoint.
Analysis paralysis ultimately causes traders to miss entry and exit signals, and affects trading decisions consequently having a considerable effect on profits.
Solution: Avoid diverting from a definite trading plan. Experienced traders only take signals prompted by tested trading strategies.
7. Not Keeping a Journal
A trading journal is there to help traders develop. It’s a detailed diary of events that helps acknowledge strengths and weaknesses.
While some traders may find this a time-consuming endeavour and not bother, the benefits far outweigh the negatives here. Recording trades also teaches consistency and discipline. It’s time well spent.
Noting the setup criteria, the time of day, and the emotions before, during, and after the trade is core entries needed in a journal. This allows you to review previous trades from an objective standpoint, and assess what could be improved on for future trades.
Solution: Keep a trading journal. It helps identify trends and patterns in your trading strategy, potentially eliminating some losing trades. It might also help recognise better positioning for protective stop-loss orders, and so on. It is a gold mine – and best of all it’s free.