Most newbie traders enter the market with big ideas, high hopes, and great profit expectations. They, unfortunately, soon find out that making money through trading is not as easy as they expected. Such frequent trading and shorter holding periods often result in both fundamental and technical analysis mistakes which can wipe out a new trader’s capital at the drop of a hat.
If you’re new to trading or planning to enter the market, here are seven of the biggest and most common trading mistakes you don’t want to make.
- Entering the trade with little preparation and training
No soldier enters the battlefield without his weapons – or he’ll die in no time. Same goes with trading. Your knowledge and preparedness are your best weapons. You have to know 100% what you’re doing with or without the mechanical systems to rely on and to prepare for whatever the markets may throw at you.
If you want to thrive in the industry, you have to master the charts and be familiar with the old and new trading methods. Not having a trading plan and/or sticking to only one plan can land you in the losers’ table.
- Neglecting the importance of recordkeeping
It’s crucial to print out a chart and write your reasons for entering the trade whether they’re fundamental or technical. Keeping a trading diary enables you to analyze each trade, review your previous trades, and learn from your mistakes which in time will help you become a better and more profitable trader.
- Anticipating quick, easy, and huge profits
Being confident and optimistic about gaining trading success isn’t that bad – as long as you don’t put together unrealistic calculations of how much you’ll make. Your so-called “beginner’s luck”, which causes you to believe that trading is key to instant wealth, will soon run out. So instead of anticipating your profits in advance, it’ll be a better option to enter the market with a neutral attitude.
- Not calculating the risk-reward ratio
The risk-reward ratio is a measure utilized by an investor to compare the expected returns of an investment to the amount of risk undertaken to obtain these returns. The ratio is calculated by dividing the amount you are willing to lose if the price fluctuates in the unanticipated direction (risk) by the amount of profit you expect to have gained when the position is closed (reward).
Most beginner traders fail to calculate the risk-reward ratio before they establish a position. If you’re a newbie, it’s always suggested to stick to a low risk-reward ratio as this will help you minimize potential losses.
- Very. Bad. Timing
Losses due to timing mistakes are common for novice traders. Let’s talk about stop-loss order – one of the crucial aspects that should be timed right. Placing a stop-loss order is perhaps the easiest way to save yourself from taking a big loss.
We can say that tight “stops” ensure that the losses are capped before they escalate. Placing the stop too tight, however, can be just as disastrous for it causes the position to get stopped out too early. With this, you are taken out of the game before the market has actually made a significant move and you fail to obtain optimum profit. Place stops according to what the market is telling you and not according to your profit goals.
- Getting too emotional
Traders are gamblers – they’re a bunch of risk-takers who get exhilarated when the game is in favor of them (and crash down when it’s going against them). They tend to lose their cool when they’re wrong about their positions. Besides, who gets jolly after losing money? However, you should always keep your emotions in check when it comes to trading. Keeping a neutral and objective state at all times allows you to be wiser when making trading decisions.
- Not knowing when to stop
If you want to be a successful trader, you should be able to take a small loss quickly if the trade is going against you. You should know when to cool down when a mistake has been made, exit, and move onto the next trade rather than holding out, hoping the market will then again turn into your favor. If you keep on holding on to a losing position, it’s not impossible for the trade to keep moving against you, letting your losses mount and depleting your capital.
Same goes with knowing how far you can let the trade run when you have the luck. When you’ve already reached your profit goals, you have to know when to take that good profit and get out.
Author Bio: Sophie Harris is one of the resident writers for FP Markets CFD Trading, a CFD and Forex Trading provider in Australia with over 12 years industry experience serving global clients. Writing informative content about business and finance is her cup of tea.