Top 7 Mistakes New Traders Make

Summary:

• Most traders suffer from the same trading mistakes.
• A trading strategy is a must.
• Determine your own rules and methods before starting out.
• Traders must harness their emotions.
• Create rules around large geopolitical events.

By understanding the most common trading mistakes and how to avoid them, new traders can accelerate their progress toward consistent profitability. Most beginner traders struggle with the same avoidable mistakes, continually repeating them. In this article, you’ll learn the top seven trading mistakes that amateurs make, along with helpful tips on how to avoid those pitfalls, create good trading habits, and improve results.

1. Trading Without a Strategy

A strategy is a roadmap or blueprint for how to trade. It encompasses entry, exit, and risk management rules, including position sizing. Over time, add in techniques for emotional management (discussed throughout the article).

Not having a strategy means trades are based on whim or impulse, and the reasons trades are taken or exited (or the amount that is risked on each trade) change from trade to trade. This makes it nearly impossible to find out what works or develop any consistency, since the methods are vague.

When starting out, it is best to define some rules based on what worked in the past (called back-testing). Keep the risk small on each trade, or even trade in a demo account before you move to live market conditions. Strive to implement the method for at least a month or 30+ trades. Then review the results and see how it could be improved. Update the rules, and repeat the process of striving to follow them for a month or 30+ trades. 

This process builds discipline and a robust trading strategy to follow over time, leading to boosted personal confidence and more consistent trading results. This is applicable whether doing stock market technical analysis, crypto market analysis, or trading options on forex.

2. Ignoring Stop-Loss and Take-Profit Orders

Ignoring stop loss limits can result in escalating losses, while ignoring profit targets could evaporate profits whatsoever.

After an entry, the stop loss caps risk, while the take profit target orders extract the profit from the position, turning it back into cash. These orders can be placed at fixed locations, or risk can be reduced and profits locked with the use of trailing stop loss orders. A trailing stop moves with price, but only to reduce risk and lock in profit, not increase risk.

Every trader will determine their own exit rules. Discipline is key, because if exits are altered while in a trade, one can develop bad habits and abandon the strategy, being guided by impulses or emotions. 

Have rules for when to exit, and adhere to them while in trades. After 30 or more trades, look to see if any improvements could be made to the rules to improve profits or reduce losses. 

The job of a trader is to follow their strategy. It is not to micro-manage positions or try to predict every price move. Write this down and reinforce it whenever trading to avoid the impulse to ignore stop-loss orders and profit targets.

3. Poor Position Sizing in Trading

Position sizing is a key component of risk management in trading. The distance between the trade entry and exit, multiplied by the position size, determines the profit or loss of the trade. 

The risk of a trade can be defined with a stop loss order. The stop loss closes the trade to cap the risk if the price doesn’t move as expected. By knowing the entry and stop loss location, pro traders can determine the ideal position size based on their risk tolerance and account size. Amateurs take random position sizes, ruining their chances of consistent performance. 

Most professional traders risk more than 1% of their account balance per trade. They may use all or part of their capital to enter a trade, but they limit risk to a tiny portion of the account.

Use the position sizing calculator on Trading.biz to calculate the proper position size every time.

Here’s an example. A trader with a $10,000 account is willing to risk up to 1% of it, or $100, per trade. They are going to buy a stock at $10 and place a stop loss at $9.75. How many shares should they buy if they want to risk $100 but not exceed it?

$100 / (10-9.75) = 400 shares. 

By buying 400 shares, if they lose $0.25 per share ($10 - $9.75), they will have lost $100, which is their maximum risk and ideal position size for the chosen risk level, account size, and trade. 

Buying 400 shares at $10 will use $4000 of the $10,000 account.

Below is a chart example.

4. Trading Without Emotional Control

Professional traders have learned to manage their emotions, while most amateurs have not. Greed, fear, anger, revenge, euphoria, and even overconfidence can easily derail a trader from following their plan if they don’t manage these feelings. 

Emotional management comes from understanding that no strategy wins all the time, and that any given strategy has certain odds of winning. Embracing that the outcome of any given trade is unknown, and that it is just one trade of many, can help reduce emotions associated with losing. 

During trading, after a loss, or when emotions are getting high, take a deep breath through the nose and into the stomach, while letting the shoulders fall and eyes close briefly. Relax, let go. Remember, the job of a trader is simply to follow their plan. The outcome of any given trade is out of even the best trader’s control.

For an objective comparison of how emotions affect trading, plug your trades into the Profitability Calculator on Trading.biz. Do this for 10 trades, comparing the rule-based results versus your actual results on those same trades. If there is a large difference, then emotions are likely causing significant deviations from the strategy.

5. Overtrading and Chasing the Market

The desire to trade, trying to catch every price move, or not wanting to miss a big move, are classified as fear of missing out (FOMO) or overtrading mistakes. 

Recall that a trader’s job is to follow their strategy. It is not to catch every price move. The strategy being followed will catch some price moves. It can be improved over time, but continually deviating from it will result in inconsistent performance and a lot of stress.

The overtrader is assuming they can predict the market, but if they could, then they should develop a strategy around it. Jumping into trades that aren’t part of the strategy is impulsive and leads to chaos.

6. Trading Without Tracking Your Performance

Traders who aren’t aware of their mistakes and aren’t continually working to minimize them are doomed to keep repeating them. 

Regularly review trades. After each trade, objectively determine if the strategy was followed. If it wasn’t, why? Whatever the reason, brainstorm ways to better manage the situation next time. What do you have to tell yourself to follow your strategy in this situation? 

Each week, or after a certain number of trades, sit down and look through all the trades. Look for ways to improve overall performance. Is there a way to squeeze more profit out of the trades? Or maybe the stop loss was too big or too small? Was there a trend, or was the price action choppy? This may provide insight into why some trades worked and others didn’t, on average.

Each trader needs to find their own most common mistakes in stock trading (or any market), and then work to improve on them. Start with the mistake that occurs most often, and keep working on it until the frequency of that mistake is near zero. Then move on to the next most common mistake.

7. Ignoring Market News and Economic Events

Prices of assets are always moving, yet major news events can cause extreme moves in an instant. When prices move sharply, even a stop loss can be ineffective at controlling risk;  the price can “gap” through the stop loss price, and so the stop loss will fill at the next available price. This could result in a much bigger loss than expected. 

This is a reality of the market, but it can be managed by understanding when really large moves are likely to occur. 

• Scheduled high-impact events on the economic calendar will affect day traders, causing sharp short-term price movements.

• Earnings are huge pieces of stock market news. An earnings release date is published in advance, and can have a huge impact on share prices. If holding positions, be prepared for potentially significantly large moves in either direction.

Be aware of news affecting the stock market, or whatever market you are trading in. While doing market analysis, notice how prices react around these events. Monitor prices in conjunction with a stock market news calendar or a forex economic events calendar. 

Professional traders create rules around such events. For example, they may exit all day trades at least two minutes before any major economic news announcements, or may close out a stock swing trade the day before earnings.

Take Control of Your Trading Journey Now!

Most new traders make these mistakes repeatedly. But you don’t have to! Use the actionable steps provided to stay focused on the proper task: following the strategy. Review trades regularly to brainstorm ways to reduce mistakes and improve the strategy. This happens outside of trading. While in trades, follow the rules in place.

Trade smarter and more confidently by focusing on what can be controlled: you and your strategy. Follow it, refine it, and repeat. This is the path out of the most common trading mistakes and into more consistent trading.