Many novice traders, and many so-called experienced traders too, fall victim to one of several mental situations that can cause them to sabotage their own trading and profits.
Trading consistently and profitably is an extremely difficult task, and there are certain traps of which you should definitely be aware.
Below are 5 common ways that novice traders sabotage their trading profits:
1. Trouble with pulling the trigger.
This can also be a case of analysis paralysis. Sometimes traders tend to immerse themselves in their research. They want to learn as much as they can, which is commendable, to a point.
However, traders can go overboard with this. Instead of learning a few technical indicators, they want to learn about all of them.
Perhaps they set up a system that requires 15 indicators, plus the sun and the moon, to all be in perfect alignment. Or perhaps you have a fairly simple system that you plan to trade, but you freeze at the first entry signal.
Whatever the cause, this is definitely a fatal flaw in your development as a trader. The most profitable trading system in the world is useless if you don’t trade it.
You can’t make any money if you never place a trade.
2. Exiting winning trades too early.
There is a natural human instinct to grab what you can, when you can. I’m sure it stems from our caveman ancestors, when grabbing might have meant the difference between life and death. We even have a phrase for it:
“A bird in the hand is worth two in the bush.”
If you are in a trade that is going in your favor, your brain is probably screaming at you, “Lock it in! Sell while it’s up!” Greed and fear rule the markets.
Greed, you want more. Fear, you don’t want to lose what you have. These two powerful emotions are hard to tame, but tame them you must.
Consider my own personal situation – I bought gold several years ago, at about $600 per ounce. I sold when it hit $1,000. And of course, we all know what has happened since then.
You have to let winning trades develop.
3. Holding onto losers for too long.
Here is the flip side of selling winners too early. We have all held onto losing trades for too long, praying they would come back into profitable territory, swearing we would sell the moment they broke even.
It’s almost like a rite of passage for traders. Of course there are smarter ways to trade.
If your system employs stop-loss orders, you must NEVER EVER cancel them and allow a trade to go further against you. And if your system does not employ stop-losses, then you need to get one that does.
I saw an article that compared trading without stops to washing windows on a skyscraper with no harness. Sure, most days everything is fine. But on that one day when you fall, you will not be washing windows ever again.
Good traders know that trades frequently go wrong, and they prepare for it. Don’t let your lack of stop loss orders deal a fatal blow to your trading account.
Always use a stop-loss.
4. Following the crowd/herd mentality.
A group of people can sometimes come up with the best solution to a problem, if they are performing rationally. But crowds can descend into panic and madness in the blink of an eye.
Have you ever watched a crowd rioting on television, and wondered what could drive perfectly normal people to act so insanely?
The herd mentality can be a powerful influence when people are vulnerable. Don’t get caught up in the greed or panic of the crowd.
Remember: Most people who trade aren’t successful. Only about 5% of traders are consistently profitable.
Make sure you stick to your own rational trading plan.
5. Not sticking to your plan.
You have chosen a trading methodology after lots of careful scrutiny of available options. You know the expected gains from the system. Yet you constantly make trades off-plan.
Perhaps you don’t take the trades when the strategy signals, because it doesn’t “feel” right.
If you are doing these things, then you have fallen into emotional and impulsive trading, which will thoroughly sabotage your trading profits. You cannot expect to achieve the proper results that your trading system offers, unless you take every trade exactly as dictated.
Assuming you are using a profitable trading system, you cannot pick and choose which trades to take based on your “instincts” or emotions. You must stick to your plan to exploit the edge, if any, that it gives you.
You must let your trading plan work for you.
There are a lot of other mistakes that newbies, and veterans alike, make to sabotage themselves and their trading profits. Becoming aware of your flaws is the first step toward taking care of them, and toward making sure they never interfere with your success in the future.