Whether you have recently decided to dip your toes into the world of speculative trading or have been trading for a few years already, there are common errors traders make when they are not constantly checking themselves.
By taking a brief look at the five most common mistakes and applying a remedy to your weaknesses, you will have a much greater chance of eliminating unnecessary losses.
1. Maxing out your margin on single trades
The egotistical phrase "Go big or go home" does not apply to trading, yet, it is the most common sentiment among beginner traders.
Entering a single trade using your entire available margin more often than not will leave you with a blown account.
Keep perspective by asking yourself the question, "If I had to lose "X" amount of my total capital on a trade, would I be able to sleep well that evening?" If the answer is "no", adjust your risk lower to be able to stomach losses. (Winning is easy, it's the losing that you need to be able to be at peace with).
Maxing out your margin is similar to placing a tight stop loss without planning risk mitigation. You will leave yourself no room for a move against your desired objective, and your trade will be auto-closed by the broker resulting in a devastating loss.
2. Trading without a plan
No planning, no research and no clear objective for your trade will leave the door wide open to the land of missed opportunities and risk mitigation.
Do your technical analysis and look at the fundamentals of the instrument you are trading. You have a much greater chance of banking profits or limiting your losses this way. Not having a plan will deprive you of the opportunity to cut your losses at an acceptable level or bank the profits when you hit your Take Profit.
So, in essence: Plan your trade and trade your plan.
3. Trading the "News"
We've all seen the movies. A trading floor with big TV screens all-round showing the news channels. Don't mistake this for an indication to trade what you see on commercialised TV. It's more of a benchmark of the current and past state of affairs. If it's on the news, it's already happened. You've missed the bus. Instead, use this information in culmination with a trading plan you were already researching using verified economic data, economic calendars and technical charting analysis.
It is common for beginner traders to self-destruct after a string of bad trades. Also known as "throwing in the towel".
Joe has R10 000 capital. He places a well-planned trade for R2k. The trade goes against him, so in a panic, he makes his first mistake of moving his stop-loss wider to allow for the move (against his initial plan). The second mistake was trying to counter the loss immediately by adding another R2k to his losing trade because "Surely it's going to turn now". The trade continues against Joe, and he gets stopped out and loses 4k.
After losing 40% of his total capital, Joe tries to recover his losses immediately by placing an unplanned and emotionally fueled trade... He loses again and then makes his last and final mistake; Joe convinces himself that the last little bit of capital he has left may as well be traded on a whim. So Joe throws a Hail Mary and goes all in.
An experienced trader, after suffering his first loss, will walk away from his trading terminal and take time to digest the loss so he can come back with fresh eyes, a clear mind and a new plan. An experienced trader will still have enough capital to turn things around where Joe would have blown his account with nothing left to be able to make a turn-around.
5. Trading Multiple Markets
If there is a trader out there who knows every market, he or she is truly an exception to the norm.
As a beginner trader, there is pretty much a zero chance you will have the skill required to stay on top of trades in multiple markets.
Cut out the distraction and stop spreading yourself too thin and instead pick one market and become the master of that market.
Sources and reference credit: Investopedia
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