The 5 Common Mistakes New Traders Make
There are a lot of mistakes a trader can make at the beginning. It is true that all traders go through a learning process, but good traders know how to recognize and mistakes earlier, while average ones keep making some of them even after a few years have passed.
Here are five of the most common mistakes:
Mistake #1 – Incapability of a trader to stick with a system that was previously agreed upon.
All traders elaborate a strategy that they follow over a course of a period of a month or even more. This strategy must not be changed by a trader just because he suffers losses during a specified day. He must judge the situation on average. If he is right about 60% of the trades and wrong about 40% of them, he is still in a great position to register a hefty profit after paying the spread. This is assuming that the trades are of equal value, otherwise the argument still holds for 60% of the volume of trades.
Mistake #2 – Not knowing when to exit a position.
Keeping a position open for a period of time after there is no justification to do that is a serious mistake that happens in the following cases:
a) The price reversed and they don’t want to take the loss. In order to see the mentality behind this reasoning we will take the following example: suppose a trader buys stock Alpha for $17 and sets a stop-loss at the $16 level. What happens when the price moves against him so that the new stock price is $16.05, very near the stop-loss? Experienced traders will just accept the loss and move on. In this case, new traders will think that the price of the stock can reverse and reach $17.10. This may cause them to cancel the stop-loss, which is a big mistake. Even if it’s true, risking $0.95 in order to win $0.10 is a losing proposition from the start, but those traders will be tempted to take profit there. However the probability of the stock moving from $16.05 to $17.10, in absence of other relevant information, is the same as the probability of the stock moving from $16.05 to $15. So on one hand we have probability 50% to win $0.10, and on the other hand we have a probability 50% to lose $2. And if the market is in a downturn, then it has a probability greater than 50% to decrease. It is easy to see that the reward doesn’t justify the risk.
b) The price has not reached the target and the price of the stock is reversing its evolution. This can also be a good signal to exit a position, but because they already set a take profit order at a specified level, traders may also get greedy and wait for the stock to reach that level, even if it’s unfeasible for this to happen. In this way they are set up to register a loss, or at least to diminish the profits they otherwise would have if they traded correctly.
c) The price reaches its target but it looks it can get higher. This is the most dangerous situation, because it means that the trader is even greedier than in the previous example and more careless than in the first. It is a big mistake to cancel the take profit order. First of all, the reasoning that made the trader set up the take profit order remains the same. The trader examined the past evolution of the price, has seen where the levels of resistance and support are and reasoned where the next rally will take the price. This reasoning is still valid when the price reaches the take profit level, because all that has happened is that the price has increased according to the previous prediction of the trader.
Mistake #3 – Using a very high leverage.
Forex brokers often give traders the possibility of trading with a leverage of 400:1. New traders must know that even a leverage of 100:1 is high for them at the beginning. That is because a leverage of 100:1 means that for a 1% movement of the underlying asset, be it a stock or an exchange rate, the trader is liable to have its whole deposit wiped out, so he loses all the money put into this trade, if no stop loss orders are set. Movements of 1% can happen in volatile market days, so it is unwise for a new trader to take such a risky position. A leverage of 20:1 or 50:1 maximum with corresponding stop losses can be a good strategy for a new trader.
Mistake #4 – Not following good money management principles.
A trader must know not to make trades that are very big in volume at the beginning, especially after just leaving the demo account and starting a real one. Risking only 2% of the total equity is a good practice, because even after 10 bad trades, there is still 80% of the initial amount in the account. If the trader’s losses reach 50%, it is not a good place to be, because the trader needs 100% return on capital just to recoup the losses. This is a feat that can be accomplished by very few traders and new traders are unlikely to achieve that. Registering losses and then depositing more money is not a good strategy, because the losses can add up. The better way to approach the problem is to manage the initial deposit in the best way possible, by only risking small amount on every trade.
Mistake #5 – Not knowing who to copy in social trading.
There are multiple criteria that define a professional trader in social trading, such as number of followers or total winnings. However, new traders must be careful, because on some sites, information as the full trading history might not be displayed. That can also mean that the trader has winnings from having a lot of followers that pay him subscription fees and not from doing spectacular trades. Also traders can become professional trader from following other professional trader, so that when they trade on their own they are not guaranteed a profit. When selecting professional trader to follow, make sure that their results are verified and also their accounts are real account instead of demo.
There are a lot of mistakes a trader can make at the beginning. It is true that all traders go through a learning process, but good traders know how to recognize and mistakes earlier, while average ones keep making some of them even after a few years have passed.
Here are five of the most common mistakes:
Mistake #1 – Incapability of a trader to stick with a system that was previously agreed upon.
All traders elaborate a strategy that they follow over a course of a period of a month or even more. This strategy must not be changed by a trader just because he suffers losses during a specified day. He must judge the situation on average. If he is right about 60% of the trades and wrong about 40% of them, he is still in a great position to register a hefty profit after paying the spread. This is assuming that the trades are of equal value, otherwise the argument still holds for 60% of the volume of trades.
Mistake #2 – Not knowing when to exit a position.
Keeping a position open for a period of time after there is no justification to do that is a serious mistake that happens in the following cases:
a) The price reversed and they don’t want to take the loss. In order to see the mentality behind this reasoning we will take the following example: suppose a trader buys stock Alpha for $17 and sets a stop-loss at the $16 level. What happens when the price moves against him so that the new stock price is $16.05, very near the stop-loss? Experienced traders will just accept the loss and move on. In this case, new traders will think that the price of the stock can reverse and reach $17.10. This may cause them to cancel the stop-loss, which is a big mistake. Even if it’s true, risking $0.95 in order to win $0.10 is a losing proposition from the start, but those traders will be tempted to take profit there. However the probability of the stock moving from $16.05 to $17.10, in absence of other relevant information, is the same as the probability of the stock moving from $16.05 to $15. So on one hand we have probability 50% to win $0.10, and on the other hand we have a probability 50% to lose $2. And if the market is in a downturn, then it has a probability greater than 50% to decrease. It is easy to see that the reward doesn’t justify the risk.
b) The price has not reached the target and the price of the stock is reversing its evolution. This can also be a good signal to exit a position, but because they already set a take profit order at a specified level, traders may also get greedy and wait for the stock to reach that level, even if it’s unfeasible for this to happen. In this way they are set up to register a loss, or at least to diminish the profits they otherwise would have if they traded correctly.
c) The price reaches its target but it looks it can get higher. This is the most dangerous situation, because it means that the trader is even greedier than in the previous example and more careless than in the first. It is a big mistake to cancel the take profit order. First of all, the reasoning that made the trader set up the take profit order remains the same. The trader examined the past evolution of the price, has seen where the levels of resistance and support are and reasoned where the next rally will take the price. This reasoning is still valid when the price reaches the take profit level, because all that has happened is that the price has increased according to the previous prediction of the trader.
Mistake #3 – Using a very high leverage.
Forex brokers often give traders the possibility of trading with a leverage of 400:1. New traders must know that even a leverage of 100:1 is high for them at the beginning. That is because a leverage of 100:1 means that for a 1% movement of the underlying asset, be it a stock or an exchange rate, the trader is liable to have its whole deposit wiped out, so he loses all the money put into this trade, if no stop loss orders are set. Movements of 1% can happen in volatile market days, so it is unwise for a new trader to take such a risky position. A leverage of 20:1 or 50:1 maximum with corresponding stop losses can be a good strategy for a new trader.
Mistake #4 – Not following good money management principles.
A trader must know not to make trades that are very big in volume at the beginning, especially after just leaving the demo account and starting a real one. Risking only 2% of the total equity is a good practice, because even after 10 bad trades, there is still 80% of the initial amount in the account. If the trader’s losses reach 50%, it is not a good place to be, because the trader needs 100% return on capital just to recoup the losses. This is a feat that can be accomplished by very few traders and new traders are unlikely to achieve that. Registering losses and then depositing more money is not a good strategy, because the losses can add up. The better way to approach the problem is to manage the initial deposit in the best way possible, by only risking small amount on every trade.
Mistake #5 – Not knowing who to copy in social trading.
There are multiple criteria that define a professional trader in social trading, such as number of followers or total winnings. However, new traders must be careful, because on some sites, information as the full trading history might not be displayed. That can also mean that the trader has winnings from having a lot of followers that pay him subscription fees and not from doing spectacular trades. Also traders can become professional trader from following other professional trader, so that when they trade on their own they are not guaranteed a profit. When selecting professional trader to follow, make sure that their results are verified and also their accounts are real account instead of demo.