Controlling Trading Mistakes
No trader gets it right every time. We all make occasional mistakes, and that’s nothing to be ashamed of –Â in fact, it’s often a good way to learn.
However, you can reduce your risk of blunders by being aware of the pitfalls that frequently catch out other traders. In this section we’ll run through some of these common errors, so you can learn from the mistakes that we have been through and steer clear of them yourself.
Insufficient Preparation
- Take your time to understand the markets that interest you, how they work and how they’ve been behaving
- Create a trading plan to suit your trading goals, your skills and knowledge and your feelings about risk
- Practise trading using a demo account, where you can get comfortable with using your trading platform and try out strategies in a safe environment
You may know of some experienced, successful traders who make it look easy. But unfortunately trading is not just a case of opening a position and waiting for the profits to roll in – a degree of skill and knowledge is essential.
Too many new traders rush in with misguided confidence and are punished for it by the markets. Don’t be one of them.
Not Following a Plan
In the ‘Planning and risk management’ course, we talked in detail about how to create a trading plan. Once you’ve done that, it’s important to stick to the course you’ve plotted for yourself.
You may be tempted, every day, to ignore your trading plan and just stay in a little longer on this trade or go in heavy on that one. But if you’ve really taken the time to develop your trading plan then you should have faith in it being the best-suited approach for you.
Even the best trading plan remains only a guide, but the better the guide, and the better you can follow it, the better your chances of success in the long run.
Lack of Record Keeping
Do you remember your first trade? What about the third, or the fifth?
If you’re new to trading, the details may still be clear in your memory. But in a few months’ time will you still be able to describe each step and decision in detail?
Unless you keep a trading log or diary, the chances are that this information will be lost. And if you can’t remember what you did right, how can you replicate it? Similarly, if you don’t know where you went wrong you could easily make the same mistakes again.
Your trading diary will let you look back at your experiences with the value of hindsight and learn from them.
Bad Timing
You need to time your entry and exit from a market perfectly as much as possible to maximise any profit or minimise any loss.
Timing mistakes are common among new traders. So how can you avoid them?
- Chart analysis will help you forecast potential scenarios by revealing market patterns
- A trading plan will help you to define your strategy, meaning you’re more likely to avoid impulsive actions
- Stops and limits will allow you to go about your business without having to monitor the markets constantly.
Not Cutting your Losses
It’s inevitable –Â sometimes things don’t go to plan and you end up with a running loss on a position. There will be times when you can ride out the storm and eventually turn a profit, but on some occasions it’s best to quit before the situation worsens. Quite often if you do this your more than likely to get caught out and if you had multiple winnings trades those profits could be wiped out in one bad trade that you don’t cut your loss on. I would say always have a stop loss in place when you take a trade and always stick to your rules to avoid this mistake.