6th March 2019
If you are just starting out trading, you can expect to make several mistakes and that’s all part of the process. However, there are certain common forex trading errors that nearly everyone makes — and being aware of them can speed up your learning curve and improve your trading skills. Here are six of the most common trading errors and day trading mistakes to avoid.
Almost every trader starts out by trading too often, especially during periods that offer few profitable opportunities. When you are under pressure or losing money, it’s easy to conclude that you need to trade more to make more money. A vicious cycle can easily begin where the need to make money causes you to take marginal trades, resulting in losses which then cause you to overtrade even more.
The trick is to allow the market to dictate your trades rather than your profit and loss, ego, or any emotional need. This is where it is critical to have a trading process that removes the opportunity for emotion to creep into your trading.
Overtrading for emotional reasons brings us to the next mistake. Many new traders try to “wing it” by trading based on tips, instincts, or the need for excitement. This seldom works out, but even if it did, it would give them nothing to build on.
A trading plan means you know exactly what instruments and time frames you will trade. You know how you will identify and filter potential trades to make sure you are only taking those with a high probability of being profitable. A trading plan also includes risk management strategies to ensure that your capital is not wiped out.
To make sure you are sticking to your plan, create a checklist that you follow for each trade, and keep a journal with the reason for entering each trade.
If it hasn’t happened to you already, sooner or later you are going to go through a series of trades where every time you get stopped out for a loss, the market immediately reverses in the direction of your trade. So, not only do you end up with a loss, but it turns out your trade could potentially have been a winner if your stop loss hadn’t been so tight.
Typically, what happens next is that a novice trader will start adjusting their stops, or even abandoning their stops altogether. The result, sooner or later, will be a series of massive losses.
Being stopped out at the worst possible level is part of trading. No matter where you set your stop loss point, you may be stopped out of a winning trade.
When you get stopped out, it’s time to move on to the next trade and leave your losing trade in the past — you cannot change it by moving your stop on the next trade.
Another common mistake novice traders make is to move from one strategy to another as soon as they experience a losing streak. Typically, they abandon their strategy just in time to catch all the losing trades and miss out on the next winning streak. And then they move to another strategy just as its winning streak is coming to an end.
All strategies have good and bad patches. You will not be able to succeed as a trader if you cannot stick to your strategy when faced with a string of losing trades.
Sometimes you will miss a potential opportunity, and sometimes you will miss an entry because you aren’t concentrating properly. Either way, the market is going to move without you. FOMO — the fear of missing out — often causes inexperienced traders to enter a trade because they have missed out on a rally and they don’t want to miss out if it carries on going.
The problem is that the market has already moved and there is now greater risk. Also, if you enter a trade late, it no longer matches your strategy — it’s a trade with no plan behind it and no rational reason for being in your account. You can avoid this mistake by always asking yourself why you are entering a trade. If you are entering a trade because you missed a move that has already happened, it’s time to pass on the trade and focus on finding a trade that actually fits into your strategy.
There are two ratios you should know when you trade a strategy: The first is the win/loss ratio, which is the size of the average winning trade divided by the size of the average losing trade. The second is the win rate, which is the probability of each trade being a winning trade. When you combine the two ratios, you get the expectancy. If a trader’s strategy has positive expectancy, they can expect to make money over time, and if it has negative expectancy they can expect it to lose money over time.
Novice traders often trade strategies with negative expectancy because they don’t know the win rate or the win/loss ratio. That means they are trading strategies that are expected to lose money.
You can work out the expectancy of a strategy by paper trading or by backtesting it on a trading platform. If you do that, you can save yourself a lot of time by avoiding unprofitable strategies.
When you learn how to trade, you face a steep learning curve. Trading is as much a battle with yourself and your emotions as it is with the market.
If you can stop these trading mistakes, you will take a lot of pressure off yourself, resulting in fewer mistakes caused by the battle with your emotions. This will speed up your learning curve and you will be able to get in tune with the market faster.
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