Trading Mistakes That Can Be Deadly for Your Account
There are some things you simply need to avoid when trading. Check out these common trading mistakes and learn from other traders’ mistakes – as opposed to spending your own capital on a lesson you would like to forget.
Failure to Manage FEAR – Get Smarter and Get More Confident
If you are afraid to trade, then you probably shouldn’t trade. The easiest way to manage your fear with trading, or really most things, is to EDUCATE YOURSELF.
People are commonly afraid of things they don’t understand. If you want to earn income from something like online trading the Forex market, you must become a professional and educate yourself as much as possible. Of all trading mistakes to make, this one has a tendency to affect people most. All too often I’ve seen a trader lose, not understand why and give up trading completely.
Want to know where your money goes when you lose? Most likely your money went to someone more educated about the Forex market than yourself. Educated people perpetually get paid by the uneducated. Forex is 97% controlled by major banks and institutions. If you think they don’t know what they are doing, you are wrong.
For example, something as simple as cooking dinner for a group of people can be terrifying. What if you overcook the meal? What if you undercook the meal? What if you season it improperly? These are fears a professional Chef does not worry about. Not to worry though, there is a recipe for success with trading the Forex and you are here to uncover it.
Failure to BE PATIENT – You’re growing a money tree, not weeds
Patience is what traders get paid for. Similar to the example with the Chef overcooking or undercooking a meal, if you get into a trade too early or too late, it will likely cost you. This is a game of knowing when to get in and when to get out, and it all comes down to timing.
Most people that open a trading account typically have ambitious and sometimes unreasonable goals. Your job is to find a plan that works, and follow the rules! When traders fail to be patient they often make multiple mistakes as a result. Don’t try to rush your success, you’ll more likely end up sabotaging it.
If trading was as easy as simply opening a position or trade at any random time and being guaranteed to make money, then banks wouldn’t allow you into the market. If you profit from trading the Forex, 97% of the time you are lightening the pockets of a very large institution or bank. This might sound scary, but banks and governments influencing the market is a best-case scenario. Most banks make decisions in a similar fashion and governments most often announce what their plans are for the future to avoid surprising their population too much.
Set up your trades with a stop and a limit, and let them play out! If you fail to avoid this trading mistake, you may never figure out a consistent plan to follow.
Not Using the Economic Calendar Properly
All players in the Forex have the similar tools available. The traders leveraging them best are the traders making all the money. Everyone has access to pricing data, charts, and an economic calendar. Free information is often the most used and should not be ignored.
Some traders choose to avoid announcements on the economic calendar like the plague and trade a purely technical strategy because it is “too complicated”. If you do this you are accepting the possibility of missing multiple trades in a row when the market decides to change long term trend direction. Others will trade fundamentals alone, which I wouldn’t recommend at all. You must consider risk to reward ratio and this will require you to take positions only if they make sense with technical analysis.
The best traders will trade a combination of a technical and fundamental strategy. Think of it this way: you wouldn’t buy a stock if you knew that the earnings report was coming out in a week and expectations were negative. The stock is almost certainly going to fall. Unless you are trading short interest options then you had better wait for the impending lower price to buy.
Economic announcements are scheduled and account for many of the patterns that happen technically. Be smart about using your economic calendar and you will have a much better idea of WHEN big moves are likely to happen. If you understand how to use the calendar, your strategy can be executed on a more predictable schedule.
Not Managing Risk to Reward Properly
Many traders look at opportunity and they only focus on the upside. Good traders can make money even when they lose most of their trades. Obviously, you want to win at least half of the time (the market can only go up or down). If your average win is more than twice your average loss, then you must only win 1 out of 3 trades to be profitable.
When you can lose most of the time and still make money in the long run, this game becomes much less stressful. If you put yourself in a situation where you must win most of the time to be profitable, then you will have a very stressful career as a trader.
If you were going to risk $100,000 with a 50% chance of success, you wouldn’t do it to make $80,000. The same thing goes for smaller amounts . That being said, risking $50 to make $100 in a coin toss situation is a risk you should take every day of the week as often as possible.
Trading Without a Plan – Fail to plan and plan to fail
Planning is important in many aspects of life. Parents that plan for their children's college education are more likely to send them there. Those are more likely the parents that help their children do their homework or at least make sure it gets done. They are also the parents that spend part of or all 18 or so years leading up to university time saving money to prepare for the financial burden of continuing education.
Trading is not an exception to this “school of thought.” Fail to trade with a plan and you are planning to fail. Experienced traders have a detailed strategy that plans for how and when decisions will be made and most importantly for impending losses. Money management is all about risk management and surviving setbacks will be the key to your success.
As mentioned above, you will be trading a market that consists of 97% large banks and institutions. Do you think the bank has plans for their money? Of course they do. So should you.
Overleveraging – Avoid Going “All In”
This is an extremely common trading mistake and is very much a result of overambition. Everyone opens an account with a given amount of money. Some people start their trading account with 50 Dollars, Euros, Pounds, etc, others start their account with much larger amounts. No matter the size of the account, successful traders respect the money in their account.
Let’s imagine that you want to double your account once per month. Any investor should be thrilled with a result like that. If you aren’t, then you will likely gamble away your money. Achieving a 100% profit in one month can be achieved by earning roughly 2.5% return per day. If you are following the rules of risk reward, you will ideally risk less than 2.5% to do that. Losing less than 2.5% of your account will likely keep you from getting too upset considering you will still have 97.5% of your money to continue trading.
Your trading account was originally funded with your hard-earned money. Treat it as such. Learn to accept a small loss and live to trade another day.
More trades placed doesn’t mean more profit. The whole point of trading is to let the market do the work and make money for you. Some traders will make more trades than others based on their strategy. Making more trades is ok, but you must make sure that your strategy is within your skillset. All traders should understand long term trend direction. Oddly enough, the shorter term your trades, the MORE you must understand about the trendl.
Having too many trades open can cause a lot of issues, the biggest being exposure. If you have a lot of trades open, you are likely risking a high percentage of your account. You may also be making more decisions than you have the skill to be making effectively. Be smart, be patient and trade within your means. In the long run, you will be glad you did.
Trading Without a Stop Loss – Set One and Stick To It
If you trade without a stop loss, you are risking ALL your available margin with EVERY trade. Reloading your account isn’t something you want to do any more than a gambler wants to buy back in at the poker table.
Don’t put yourself at risk of being “on tilt” and manage your risk with care. Things like moving a stop loss or setting one somewhere that you can't afford are huge trading mistakes. Only enter a trade if you can afford to lose and let things play out. If things go against you, live to trade another day in a better opportunity.
Not Using a Trustworthy Broker
Many brokerage houses take unfair advantage of people that don’t read fine print or are unable to understand the market. Most operate with a floating spread and some have considerably greater liquidity than others. Large, regulated brokers are often more trustworthy simply because they have more capital and some sort of government entity that sets rules for them. All brokers make money, or they go out of business. Make sure you are working with one that has rules to follow and the capital to pay you out when you win. It doesn’t matter how good of a trader you are if your broker is going to steal your profit anyway.
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