New traders, those who jump right into trading without careful analysis and preparation, often make a range of mistakes, from silly accidents to potentially career-ending whoppers. Novice traders, entering the market with a false sense confidence, can succumb to a variety of common trading errors and miscalculations.
Veteran traders usually have learned these lessons the hard way, by experiencing all or most of them first-hand. If you are able to fully understand and implement these lessons just from reading about them, you are well on your way to a great career as a successful trader.
Unfortunately, however, these common trading errors tend to be ones that everyone must make at some point in their career before they can overcome them. The key is to learn from these common trading errors when you make them.
7 Common Trading Errors All Traders Make (but Successful Traders Learn From)
Sometimes the difference between making consistent profits and losing your shirt is whether or not you can learn from your mistakes. If you don’t even recognize that you are committing these common trading errors, you will never change your bad trading habits. With that in mind, let’s look at some of the most common trading mistakes.
Below are 7 of the most common trading errors:
1. Focusing only on the potential gains
This is the exciting part of trading, the potential to make a lot of money in a short amount of time. Everyone sees the headlines: “I turned $1,000 into $1,000,000 in three days!” (OK, that’s a *bit* of an exaggeration, but not by much.) These sorts of claims are especially common in regards to some of the most dangerous investment vehicles available to the general public: Forex, futures and options.
The flip side of that claim, which no one ever mentions, is “I wiped out my entire account in three days.” Anything that offers the possibility of making a lot of money quickly also offers the possibility of *losing* a lot of money quickly. You can’t have one without the other.
Keeping this fact in mind is one of the first lessons you MUST learn if you intend to trade for longer than a few months. The calculation of potential loss must be a part of every planned trade, and this calculation must provide the lowest possible potential loss for the highest possible potential reward.
2. Incorrect position sizing
One of the reasons that Forex, futures and options offer such incredible potential gains is because of the amount of leverage that is permitted in such accounts. When you trade a stock using leverage (also known as on margin), the most you can trade is two times the amount of available cash in your account.
With Forex and futures, however, the level of leverage is much greater. In Forex, you can usually trade up to 50 times your cash. Some brokers even allow 400:1 leverage.
This is, quite frankly, a crazy amount of leverage. If you trade 400:1 leverage with a small account, you are almost guaranteed to wipe out your account within just a couple of losing trades.
Because of your high leverage, you will likely set your stops very tight, so that you don’t “lose too much,” but these tight stops will probably just serve to restrict your trade, and stop it out before it has time to develop properly.
A couple of bad trades, using enormous leverage, and your entire trading account is gone. Most experts advise that you never trade beyond 10:1 leverage, even when you become more experienced.
This can happen for a couple of different reasons. First, you might set small target prices, and be happy that your win average is increasing. You might take 5 long trades in one day, for 5 pips each, and consider yourself very successful.
On the other hand, you would have done better, by avoiding the spreads, to have made only one trade for 25 pips.
A second common reason for overtrading is when a trader becomes impatient. Your trading strategy does not provide frequent-enough signals, and you get itchy to “be in a trade” instead of sitting on the sidelines. This leads to trading off-plan.
If you must do so, the best way is to do it in a practice account or in a small, experimental account, rather than in your main trading account where you trade your established plan.
Also known as “searching for the Holy Grail.” Veteran traders have lived long enough, account-wise, to understand that there is NO PERFECT SYSTEM. Every system has its flaws.
There is no such thing as a system that will always win and never lose. There are only systems that have performed well in the past and are fairly reliable predictors of good performance in the future.
Finding one of these good trading systems is difficult, but it can be done. However it takes time and effort, and one of the hardest things is trying out a system to see if it works for you.
Inevitably, when you try a new system that appears to have worked well for others, it will start out working not-so-well for you. The common error is to assume immediately that it is “broken,” or that it no longer works, and to move on in your search for another.
Trading systems have ups and downs, they have occasional strings of losses, and you must test one out thoroughly (backtesting and demo trading) and give it time to work, before you dump it for another.
5. Trusting everyone but yourself
Sometimes, as a new trader, you will look to advice from a more seasoned trader, rather than relying on your own knowledge. OK, as a newbie, you will do this pretty much *all* the time. You don’t know enough, in the beginning, to trade strictly from your own knowledge.
This is the time when you should probably be trading only in a practice account, but that’s another issue.
Once you have an established base of knowledge, however, and possibly a trader or two who you respect and can follow their methodologies, it is better to cut off most of the “noise.”
It can be far too distracting and destructive to listen to many people offering a myriad of opposing opinions. Spending too much time on other people’s opinions will only serve to confuse you, and make you doubt your own plans.
6. Going against the market
This can also be phrased as “The Trend is Your Friend.” Unless you have demonstrated an exceptional talent for picking reversals, your best bet is to make your trades in the same direction as the prevailing trend.
Yes, the trend is broken from time to time, and you may be one of the incredibly-skilled traders who can determine in advance when that will happen. But a much higher probability of success lies with those who trade with the market, and not against it.
One of the most common novice trading errors is try to trade against the market, whether traders are unaware of the significance of the trend, or they are trying to utilize advanced counter-trend or trend reversal trading techniques.
Counter-trend trading techniques should only be used by traders who are already consistently profitable in the market, and are seeking to expand their trading repertoire.
7. Revenge trading
Taking revenge for a loss? You might not think that is what you are doing, but chances are, if you don’t have excellent control over your emotions, it is *exactly* what you are doing.
Have you ever thought, “I need to make this loss up,” or “Just 50 pips and I am back to break-even”? Any time you are thinking of your upcoming trade in terms of what it means for previous trades, you are engaging in revenge trading.
Revenge trading is usually quite aggressive, and can cause you to disregard your trading plan. You might force an entry or an exit, or you might place a trade with a position size far greater than your rules dictate. Whatever the method, the outcome is likely to be even worse than the initial losing trade, compounding your anger and desire for “revenge.”
You cannot get “revenge” on the market. The market does not have emotions, it does not say, “damn, that trader got his money back from me.” The market does not care about you, or your trades, and you must not either.
Any individual trade can lose. That is the nature of trading. Move on to the next one, and let your edge play out over time.
The most common trading errors that novice traders encounter generally have to do with mindset. Beginning a career as a trader without the proper study and practice would be like beginning a career as a doctor without going to medical school and becoming a resident. In the case of traders, though, the only damage they can do is to themselves.
Take the time to learn and practice. Learn from the common trading errors that others make. Don’t repeat these mistakes when you make them. Listen to the truly successful, not the braggarts. Be prepared to work hard at this. There is no shortcut to trading riches.