The Three Biggest Trader Mistakes

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The Three Biggest Trader Mistakes

While there are many mistakes that can hurt a trader, these are three big ones. Get a handle on these and many other aspects of your trading will fall into place.

Risking Too Much on Each Trade

I address risking too much a lot in my articles because it is so important. I recommend not risking more than 1% of your account on a trade, and at absolute maximum 2%. Usually I state the mathematical reason: “With using this approach even a series of losses won’t significantly draw down your account.” But that isn’t the only reason.

Here are a few others which highlight how actually risking less can produce more profit:

  • When you risk 1% you are less concerned about that ONE trade, which means you are free to seek other opportunities. Like a casino, if you have a solid strategy, the more valid opportunities you trade the better your results are likely to be.
  • Related to the prior point, risking 1% on 10 trades is much better than risking 10% on 1 trade. You could easily lose that 1 trade for 10%, but the chances of losing 10 trades is slim. You have the same upside, but less downside by diversifying your positions.
  • Risking 1% per trade is less mentally draining than worrying about a large position (where you risk 5%+), which means your mind is actually clearer and more objective…qualities you need as a trader.

Switching From Strategy to Strategy

Most traders try a strategy for a couple days or couple weeks, but abandon it once a few losing trades show up. They seek something better; that will produce more profits, quicker. The irony is that jumping from strategy to strategy actually makes for a very poor trader, since it creates and shows a lack discipline.

Discipline is one of the key traits of a trader. So by sticking to a strategy you’re actually exercising your discipline and will likely improve as a trader. Most traders don’t even give a strategy a chance to prove itself though. Losing trades are a part of trading, even strings of losses.

If you decide to trade a strategy, stick to it for at least a month, and then look at the results. Even if it isn’t a great strategy, by risking less than 1% per trade (see above) you aren’t likely to lose much money and you will become more disciplined. If it produces a profit, you are in the minority of traders who profit, so stick with it. If it produced a loss, consider why. This information will help you select a better strategy.

Not Actually Trading the Method Selected

A trader may have a winning strategy, but they don’t trust it. Therefore, they take additional trades or don’t trade all the strategy signals. The trader is therefore not even trading the original strategy, yet the strategy is often blamed for losses. This results in the continual search for a new strategy (see above).

What most traders fail to realize is that in most cases it is not the strategy at fault. The trader is at fault for not following the strategy.

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This is the mental part of trading. Our emotions tell us to do all sorts of things that are contrary to our strategy. Yet sticking to a method is the only way to counteract these emotional urges and actually gain consistency.

Before you conclude that a strategy or method of trading isn’t profitable, consider whether you are actually following the system as intended. Did you skip trade signals? Have you taken trades which aren’t part of the system? Have you risked more than 1% per trade, which could cause you to lose objectivity because you “need” the trades to work out? If you answered yes to any of these questions, you can’t blame the system; you need to look at yourself.

Final Word

Getting a handle on these issues will result in other issues disappearing. By keeping risk small you are more flexible and objective to take on more valid trades which will likely increase profits. Sticking to one method of trading will create discipline and give a very good idea of what works and what doesn’t. Jumping from strategy to strategy won’t do that. Once a strategy is selected make sure to actually follow it. Most traders blame a trading system, when it is the trader who is not following it correctly. If you want to be a successful trader, don’t make excuses for yourself. Work on these issues, get them under control, and results will follow.

The 44 Most Common Trading Mistakes That You Probably Still Make

The 44 Most Common Trading Mistakes That You Probably Still Make

Awareness is the first step towards improvement and that is why we collected the 44 most common mistakes a trader can make. Making mistakes is not bad at all and it is part of the process, but when mistakes are made repeatedly, bad and unprofitable habits are formed. The more bad behavior you can eliminate from your trading, the better.

General Trading Mistakes

1. Changing your trading strategy after 5 losing trades in a row
Losing is unavoidable and even the best traders will regularly realize losses. Changing your approach after a few losing trades sets you back on the learning curve. Stick to your approach, every losing streak will end.

2. Not expecting the unexpected
A sudden market collapse, an unexpected news release or the loss of your internet connection can happen at any minute. Be prepared by having a fixed stop loss in place. If a single trade could wipe out your trading account, you have not done your homework as a trader.

3. Not keeping track of relevant news releases – denying the importance of news
Even if you are a purely technical trader, you do not have to trade the news, but you have to be aware of them at any point in time.

4. Not being prepared
Do you just fire up your computer, start your trading software and dive into the charts? Just like a plane pilot doesn’t just ask his co-pilot after the take-off where they are heading, a trader needs to have a detailed trading plan for the upcoming trading session.

5. Not doing a post-trading analysis
What you do after your trading session is over determines your future success as a trader. The professional traders analyze their trades, crunch data and plan for the next day.

6. Not using a trading journal
One of the surest signs that you do not have a future as a trader is when you do not have a trading journal and claim that you do not need one.

7. Not fully learning one method
The consistent losing retail trader jumps from one method to the next, hoping to stumble over the Holy Grail. You have to accept that there is no superior trading method and that it comes down to your abilities to make a trading strategy work.

8. Failing to adapt to changing markets
Once you find a way to consistently make money trading, the work does not end. Financial markets are ever changing and evolving organisms. If you fail to adapt to changing market conditions, you will be out of business shortly after.

9. Letting hindsight influence your trading
Amateur traders watch a trade after they have exited it and beat themselves up if they have entered too early. Other times they try to find reasons why a trade was a loser to change their whole trading approach on the spot. The professional trader collects data and makes educated trading decisions based on a large enough sample size.

10. Not understanding the difference between long term and short term perspective
Over the short term, anything can happen. You cannot control the outcome of your trades and you can certainly not predict the outcome of your next two, three or even ten trades. But over the long term, that does not even matter. If you have a trading strategy that has a positive expectancy and follow it religiously, the only possible outcome is making money.

What Traders Say

11. A smaller stop loss means less risk
The distance of your stop loss has no relation to the potential risk of your trade. Risk is measured in a potential loss of your trading account. You have to set the stop distance in relation to the take profit distance and the trade size to get an idea of potential risk.

12. You measure performance in pips
A sure sign that traders don’t know what they are talking about is when they start comparing profits in terms of pips. Pip measurements are totally random and have no value of expressing performance. Pips are relative!

13. Claiming that winrate and risk:reward ratio are useless
Whereas by themselves a winrate or a risk:reward ratio has no value, together they are all a trader needs in order to determine his future trading performance. The combination of risk:reward ratio and winrate is one of the most powerful concepts in trading.

14. Making claims such as: “Make up to $2000 per day daytrading”
Talking about absolute numbers in trading is an easy sign that someone is trying to scam you. A possible return can only be stated in percentages. However, without talking about the risk involved, stating potential profits is a pointless and dangerous thing.

15. Blaming HFT and algorithm trading for your inability to make money
HFT and algorithms are not the reason why you cannot make money. High Frequency Trading and trading algorithms are nothing but new technologies that change the way the game is being played. Traders were scared that the telephone, computers and the internet are going to destroy trading opportunities. Go back to #8 and read it again.

16. Believing in price forecasts
“If someone knew that the price will go to $40 tomorrow, it would go to $40 today.” It is impossible to predict where price is going to go in the future. Because of the numbers of traders, economists or so-called ‘trading gurus’ and the amount of forecasts, you will always find a handful of people that guessed right. Don’t blindly follow someone who was plain lucky.

17. You use the words casino, boring, firework, killing it to describe your trading day
Markets go up and they go down, sometimes they move fast and sometimes a little bit slower, but it is the nature of how financial markets behave. However, if you are trading because of a thrill and excitement, you won’t last long in this business. Adopt a professional mindset and use appropriate language to avoid emotional trading.

18. You use absolute words like never and always to talk about what is going to happen
Using absolute terms in trading is a very dangerous thing to do, always! If you have seen that a certain setup has worked 100% out of the last 20 times, it can very easily fail when it occurs the next time. And just because you have never seen prices going sharply against you, it is still not an excuse to not use a stop loss order or take a bigger position.

19. Using the words ‘hope”, “wish” or ‘feel’ when talking about a trade
If you hear yourself saying or thinking that you hope or wish that price is behaving in a certain way, exit your trade immediately and do not trade any further. Traders have to rely on hard facts and trade based on actual statistics of proven methods. Trading based on emotions is a major reason why retail traders fail consistently.

Risk & Money Management

20. You watch your floating P&L
While being in a trade, do not watch your account go up and down with every tick. It will result in emotional trading decisions.

21. Thinking about what you can do with the current profit or what you could have done with the loss you could take
Only risk what you are can lose comfortably. Trading too big results in trading decisions that are based on fear and greed, the two biggest enemies of traders. On the other hand, trading too small makes you sloppy and more likely to abandon trading rules and risk management.

22. Not paying attention to correlations and how they increase your risk
Financial markets are highly correlated. Traders often believe that by taking several trades in different instruments they are diversifying and lowering their risk. What these traders don’t realize is that, especially if your trading instruments are somehow related, they often move in sync and instead of decreasing your risk, you are actually increasing it.

23. Using a fixed stop loss with the same pip amount on different instruments
Traders who use a fixed stop loss with the same pip amount on different instruments and/or different timeframes haven’t understood the rules of the game. There are no shortcuts to trading success and developing a sophisticated and tested stop loss strategy is just as important as knowing when to enter a trade.

24. Underestimating the significance of drawdowns and their statistical likelihood
Most traders believe that if a trading strategy has 5, 6 or 7 losers in a row, it cannot be a good trading strategy. What if we told you that a trading strategy is still valid after 10 losing trades in a row?

25. Adding to losing positions
This is a big no-go! Learn to take losses because they are normal. Trying to delay the realization of losses is the death sentence for your trading account.

26. Risking an arbitrary number of 2% on each single trade
Setups vary in quality and your position size should account for that. Learn to distinguish between different qualities of setups and entries and use a professional position sizing approach.

27. Ignoring the importance of spread
Research discovered that only about 1% of all day traders are able to predictably profit net of fees. Spread is the cost of doing business as a trader and, therefore, finding ways to minimize your costs should be high on your priority list.

28. Holding losers while selling winners
Research discovered the so-called disposition effect which states that on average, traders sell winning trades 50% faster than they hold losing traders.

29. Trading an account that is not the right size for you
Whether your trading account is too big or too small, both scenarios are less than optimal and have negative effects on trading performance because they are the cause of emotional trading decisions.

30. Denying the importance of math and statistics in trading
Math and statistics are boring and hard, but it does not matter whether you like it or not, as a trader you have to understand the basic math concepts. In the end, trading is nothing but juggling with probabilities, calculating odds and trying to move them in your favor.

Trade Management

31. Not having a trade checklist
Especially for beginning traders, having a checklist that you go through before you enter a trade can significantly increase your performance. A checklist can keep you out of trades that do not match your criteria and increase your discipline easily.

32. Widening your stop loss order when you see price going against you
This is another no-go. Your stop loss is the place where you accept that your trade idea is wrong. Widening a stop loss orders signals that your emotional responses have taken over and that you cannot make sound trading decisions anymore.

33. Using mental stops because you think it gives you more flexibility
A mental stop loss has no advantages whatsoever. None!

34. Pulling your stop loss order to breakeven
Unless it is part of your trading strategy and you can statistically verify that moving a stop loss to breakeven is the optimal approach, don’t do it. Moving a stop loss to break even is a sign that you are afraid of taking a loss and giving back profits.

35. Moving your stops too close
Price moves in waves and you have to give your trades room to ‘breathe’. Moving a stop loss too close to current price will often get you out of trades that would have gone to your take profit order. Learn to distinguish between minor retracements and reversals.

36. Using the big round numbers or famous moving averages for your stop loss placement
Research showed that price behaves significantly different at round numbers and that the reversal frequency is higher in such places as well. The professional players are aware of the fact that retail traders are lazy and just pick what is obvious and easy and it is even more easy to use this knowledge to their own advantage.

Common Sense

37. Expecting to become rich any time soon
The trading industry created the illusion that with enough leverage, the right trading strategy and some luck you can make a lot of money easily. However, even after years of losing money month after month, ‘traders’ still believe that the only reason they have not become a millionaire is because they haven’t found the right strategy yet. Wake up!

38. Not treating trading like a business
Trading is not necessarily hard or difficult, but the approach of the average trader makes it impossible to earn profits from trading. Testing different ideas, calculating and analyzing data, tweaking, continuous self-improvement, preparation, journaling and discipline are all the things the regular trader does not want to hear about and that is exactly why more than 99% of all traders will never make money.

39. Buying a $10 EA
At one point, traders will give up trading themselves and start looking for trading robots or EAs to make them rich. They then buy a $10 trading robot from a random website or from an unknown guy in some trading forum without even understanding what the robot does and start trading their own money. If you still don’t know why this is a bad idea, you have to find out for yourself.

40. Believing that price cannot move higher/lower
Even when price has been in a prolonged rally for several months, you will always find traders who week after week tell you that the turn is imminent and they are looking for short entries. Traders would do well to focus on what is obvious and join the trend as long as it is possible.

41. Trading your own money and savings after 3 months of demo trading
Even people who have been to college or university and who spend years to prepare for a job and then worked their way up are among those traders that open a demo account, take some random trades and then after 3 months of mixed results start trading their own savings. The possibilities that trading offers are limitless and can blind people, but the pitfalls are just as big and the next margin-call is just one click away.

42. Cursing Indicators while praising candlesticks
Whether you are trading price action or are a follower of indicator-based trading strategies, it does not make a difference to your chance of success as a trader. Although people will tell you otherwise, the strategy you choose has no impact on your trading success. It comes down to how you apply the strategy, tweak the parameters and manage yourself as a trader.

43. Analyzing your performance on a daily basis
Do not try to be profitable every single day, week or month. Trading is a long term activity and you do not have any influence on the outcome of your trades. Your only responsibility as a trader is to find a method that has a positive expectancy, religiously apply it and constantly monitor every little aspect of your performance. Do not try to force winning trades, the markets will show you who the boss is.

44. Following advice from random people
Never ever take trades based on opinions, tweets or promises made by other people. “Give a man a fish, and you feed him for a day; show him how to catch fish, and you feed him for a lifetime.”

10 Avoidable Mistakes Forex Day Traders Make

Your success depends on avoiding these pitfalls

The foreign exchange market (forex) has a low barrier to entry, which makes it one of the world’s most accessible day trading markets. If you have a computer, an internet connection, and a few hundred dollars, you should be able to start day trading.

This easy-entry is not a promise of a quick profit, however. Before you take the plunge, consider these 10 common mistakes you should avoid, as they are the main reasons new forex day traders fail.

If You Keep Losing, Don’t Keep Trading

There are two trading statistics to keep a close eye on: Your win-rate and risk-reward ratio.

Your win-rate is how many trades you win, expressed as a percentage. For example, if you win 60 trades out of 100, your win-rate is 60%. A day trader should work to maintain a win-rate above 50%.

Your reward-risk ratio is how much you win relative to how much you lose on an average trade. If your average losing trades are $50 and your winning trades are $75, your reward-risk ratio is $75/$50=1.5. A ratio of 1 indicates you’re losing as much as you’re winning.

Day traders should keep their reward-risk above 1, and ideally above 1.25. You can still be profitable if your win-rate is a bit lower and your reward-risk is a bit higher, or vice versa. Try to keep it simple though, and develop strategies that win more than 50% of the time and offer a better than 1.25 reward-risk ratio.

Trading Without a Stop Loss

You should have a stop-loss order for every forex day trade you make. A stop-loss is an offsetting order that gets you out of a trade if the price moves against you by an amount you specify.

When you have a stop-loss order on your trades, you have taken a large portion of the risk out that investment. If you start taking losses on a trade, the stop-loss prevents you from losing more than you can handle.

Adding to a Losing Day Trade

Averaging down is adding to your position (the price you purchased the trade at) as the price moves against you, in the mistaken belief that the trend will reverse. Adding to a losing trade is a dangerous practice. The price can move against you for much longer than you expect, as your loss gets exponentially larger.

Instead, take a trade with the proper position size and set a stop-loss on the trade. If the price hits the stop-loss the trade will be closed at a smaller loss than it would have without it. There is no reason to risk more than that.

Risking More Than You Can Afford to Lose

The key part of your risk management strategy is to establish how much of your capital you are willing to risk on each trade. Day traders ideally should risk less than 1% of their capital on any single trade. That means that a stop-loss order closes out a trade if it results in no more than a 1% loss of trading capital.

That means that even if you lose multiple trades in a row only a small amount of your capital will be lost. At the same time, if you make more than 1% on each winning trade your losses are recouped.

Another aspect of risk management is controlling daily losses. Even risking only 1% per trade, you could lose a substantial amount of your capital in a single bad day.

You should set a percentage for the amount you are willing to lose in a day. If you can afford a 3% loss in a day, you should discipline yourself to stop at that point. Day trading can become an addiction if you let it. Only play with the money you have set aside, and stick to your strategy.

Going All In (Trying to Win It All Back)

Even if you have a risk management strategy in place, there will be times you will be tempted to ignore it and take a much larger trade than you normally do. The reasons vary, and you’ll be tempting fate to do her worst.

You might have had several losing trades in a row, which will make you want to earn back some of the losses. A winning streak can make you feel as if you can’t lose. There will always be one trade promising such good returns, you are willing to risk almost everything on it.

If you risk too much you are making a mistake, and mistakes tend to compound. Traders have been known to their stop-loss order in the hopes of a turnaround. Many also get caught up keeping their margin, telling themselves it will turn around and they’ll win big.

When you feel this way, stick to your 1% risk per trade rule and your 3% risk per day rule. Resist temptation, stick to your risk management strategy and avoid going all in or adding to your position.

Trying to Anticipate the News

Many pairs (two stocks—one long, one short, both correlated) rise or fall sharply in the wake of scheduled economic news releases. Anticipating the direction the pair will move, and taking a position before the news comes out, seems like an easy way to make a windfall profit. It isn’t.

Often the price will move in both directions, sharply and quickly, before picking a sustained direction. That means you are just as likely to be in a big losing trade within seconds of the news release as you are to be in a winning trade.

There is another problem. In the initial moments after the release, the spread between the bid and ask price (highest purchase price and lowest sell price) is often much bigger than usual. You may not be able to find the liquidity you need to get out of your position at the price you want (using smaller trades to get out of the position).

Instead of anticipating the direction that news will take the market, have a strategy that gets you into a trade after the news release. You can profit from the volatility without all the unknown risks. The non-farm payrolls forex strategy is an example of this approach.

Choose the Wrong Broker

Depositing money with a forex broker is the biggest trade you will make. If it is poorly managed, in financial trouble, or an outright trading scam, you could lose all your money.

Take time in choosing a broker. There is a five-step process you should go through when deciding on which broker to use. You should consider what you want to accomplish, what a broker offers, and use reliable sources for broker referrals. Then, test the broker using small trades at first, and don’t accept offers of bonuses with their services.

Take Multiple Trades That Are Correlated

You may have heard that diversification is good. Diversification is a strategy that depends on your knowledge, experience, and what you are trading. Warren Buffett once said about diversification:

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

If you believe in diversification you may be inclined to take multiple day trades at the same time instead of just one, thinking you are spreading your risk. Chances are you are actually increasing it.

If you see a similar trade setup in multiple forex pairs, there is a good chance those pairs are correlated. That is why you are seeing the same setup in each one. When pairs are correlated, they move together, which means you will probably win or lose on all those trades. If you lose, you have multiplied your loss by the number of trades you made.

If you take multiple day trades at the same time, make sure they move independently of each other.

Trade Based on Fundamental or Economic Data

It is easy to get caught up in the news of the day or to form a bias based on an article you read that says economic conditions are good or bad for a particular country or currency.

The long-term fundamental outlook is irrelevant when you are day trading. Your only goal is to implement your strategy, no matter which direction it tells you to trade. Bad investments can go up temporarily, and good investments can go down in the short-term.

Fundamentals have absolutely nothing to do with short-term price movements—using fundamental analysis causes you to focus on the wrong concepts and form biases. Any long-term biases can only cause you to deviate from your trading plan. Your trading plan and the strategies it contains are your guide in the market and prevent you from taking unnecessary risks, or gambling.

Trading Without a Plan

A trading plan is a written document that outlines your strategy. It defines how, what, and when you will day trade. Your plan should include what markets you will trade, at what time and what time frame you will use for analyzing and making trades.

Your plan should outline your risk management rules and should outline exactly how you will enter and exit trades for both winning and losing trades.

If you don’t have a trading plan, you are taking unnecessary gambles. Create a trading plan and test it for profitability in a demo account or simulator before trying it with real money.

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