Education / Trading tips

Common mistakes in trading and how to avoid them

Market traps are not for beginners only.

It may seem at the first sight that only beginners make evident mistakes in decision making process and suffer losses, that expertise and habits come with years of experience. And it's really so. But psychology of trading isn't a precise matter. The market includes different psychological factors, so anyone can drop the ball.

So common causes of traders' failures are:

1. Trading with somebody else's trading style

Both beginners of the market and quite experienced traders are tempted by following market experts. But the latter in most cases trade intuitive decisions based on years of experience and exhaustive understanding of the market. So you hardly succeed to beat them at their own game. On the contrary, put a slightly different well-defined trading plan you can win with in place and follow it no matter what.


2. Flooded computer screen

Real time market data, price bars, charts, number of stocks and indicators, different timeframes. It's impossible to place all this data on one computer screen. Sure, you can work with five monitors at a time, but are your brains able to percept and process all this stuff right and quickly enough? Very often market gives no time for doubt or a second thought. You must be confident in yourself and in what you are doing. So, in such situation simpler system is better, unless you are not a genius with 30 years of trading experience.

3. Inconvenient Timeframe

It is considered that most successful traders are scalpers, who trade dozens of positions a day. But every trader should find a timeframe that fits his/her experience, lifestyle and temperament. Think over how much time you can devote to trading and choose your own style in the market. For example, it does not make sense to try day trading, when you cannot monitor the markets continuously.

4. Too much capital in one trade

Position size should be set according to your inner risk acceptance. When in doubt, put less money at risk. At the same time it's important to monitor the stress and confidence in the position. The size of your account should also determine the position. If you are risking a percentage of your account that potentially brings your ability to keep trading into question, your position is too big. If this means you cannot trade certain instruments, look for more convenient ones.


5. Costly blunders - wrong entry and exit

On the one hand, holding losing stocks too long - or selling winning stocks too early. Many traders quit the positions just before really strong moves start. They had the right entry but could not be patient. On the other hand, trader often wait to long before entering an uptrend or are too thoughtless to place an order without waiting for a determined trend. This can occur when a trader lacks patience or discipline to follow the plan he/she organizes. Sure, stress can influence your ability to execute your trading system, to recognize, when the market is likely to consolidate and when it is likely to reverse. And so this leads to losing a balanced perspective on what is actually happening in the market and in your open positions.

6. Temptation of activity

There are both active and inactive periods in the market. And it's a lure for traders to push it by placing sometimes improper or unnecessary at all orders just to compensate for nothing happening in the market. So try not to overtrade. Moreover, any time you own a security, ask yourself if you would buy it today. If you wouldn't buy it, you should consider selling it.


7. Being too greedy

It is clear that when buying in the bottom and selling in the top you get maximum profit. But it requires an expertise and sometimes good fortune. Trying to pick tops and bottoms of the market can be dangerous, from the point of view that you can easily miss those points in stock price and suffer from a collapse. Besides, it's unjustified to compound your losses by averaging down, in other words to keep buying additional shares at lower prices. It is tempting to think a loss "doesn't count" until the position is closed - but it does.

7. Self-confidence

Regardless of how experienced you are, take the time to learn, master the basics and the nuances. Many investors spend their time looking for easy money (which is not an easy search in fact) instead of learning the key factors to security prices. Thousands of dollars can be saved by beginners, if they devote enough time to learn and practice. Nowadays there are so many theoretical resources and practical seminars available that there is no excuse for light-minded entering the markets. Demo accounts can be found for all major markets. That means you can practice your order execution, and you can paper/demo trade your system to confirm its viability before putting a single dollar at risk.

8. And the last thing to take into consideration is outside tips

Choose newsletters and market advisors carefully. Don't trade on "tips" from friends and relatives. In the long run it is your money on the pot.