5 Common Mistakes Beginner Traders Make
Learning a new skill takes time. And a significant part of the learning process is understanding how to deal with the mistakes that will, inevitably, be made.
How quickly we learn from our mistakes when trading determines how successful we can be. The most important thing is to make sure that a single mistake does not result in a situation from which you can’t recover.
After talking to experienced traders, we’ve compiled a list of five common mistakes a new trader could make so you can avoid them. We’re good like that.
1. Failing to create a trading plan
We all have losing trades. It isn’t possible to get every trade right. But how we deal with these losing trades is key. Every time you enter a new position you should have a target entry price, an idea of where to take a profit if the trade is successful and a stop loss - the level we will close the trade if it is losing us too much money. These are all essential elements of a good trading plan. It’s also vitally important to understand the market you’re trading. This includes being informed about the market’s potential volatility, knowing the factors that may influence the price and being aware when information is released that could dramatically increase trading activity.
2. Listening to others
Listening to others who claim to have a ‘sure-fire system that will guarantee a profit’. There is no such system. So please don’t waste your time and money chasing short cuts that promise success. Yes, there’s plenty of valuable information that can be found on and offline from reputable, market experienced educators. But anyone claiming that they have a sure-fire method to beat the market should be ignored. If they had the answer, why would they share it with anyone else?
3. Making a bad situation worse
When the market moves against you it’s very easy to lose your discipline and become reckless. You could come up with reasons to sit back and let losses mount rather than closing out your position. Or you could add to your losing position by opening another position in the same direction. This last fault is called ‘averaging in’ as it means that you now have a better ‘average’ entry price for your total trade. But by adding to a losing trade, you run the risk of increasing your potential losses dramatically. You’ve also gone against your trading plan which means your emotions will take over. You’re now just ‘hoping’ that the market will recover. The word to focus on here is ‘hope’. You are no longer basing your decisions on research and your trading plan. This is where a bad situation can quickly escalate into one from which you can’t recover, putting all your trading capital at risk.
4. Risking too much on one trade
This mistake is linked to having a poor understanding of the market you are trading. A trade of £1 per point on the UK 100 has a very different risk profile from a £1 per point trade on the Wall Street 30. Don’t apply a one-size-fits-all staking plan to your trading. Make sure you appreciate the potential volatility of the market and adjust how much you are prepared to risk accordingly.
5. The fear of missing out
It’s easy to become influenced by stories from other traders in chat rooms about how successful they’ve been trading a market with which you’re not familiar. It’s very tempting to trade on tips from others as it feels good to be in the same trade as other people, and you don’t want to feel you’re missing out on a potential money maker. It also means you don’t have to put in the homework that you would if you were making your own trading decision. But remaining disciplined becomes so much harder when you are listening to others who will assure you that the big move they’ve been promising is just around the corner.
So, these are the top 5 mistakes that we’ve identified as a problem for anyone new to trading. If you can avoid these, then you’ll dramatically increase your chances of a successful trading career.