Most beginner traders slip into the same common trading mistakes. In this article, we will highlight the major pitfalls new traders can experience and how to avoid them.
Why Trade?
Traders should define their purpose for getting started in trading. Are you looking for a steady monthly income or medium-long term investment? This brings us to the second criteria, which is the level of commitment. Traders aiming for a monthly income require full dedication to the job while investors would allocate the adequate time to decide which market/ instruments to invest in or simply recruit an asset manager for the job.
Your Personality:
Traders have different personalities which reflects on our risk tolerance level. That said, instruments with high volatility won’t be favored by traders with low risk tolerance and vice versa. Logically, instruments with high volatility would be traded by scalpers and day traders who are fully dedicated to trading, thus generating their monthly income. It is simply a preference that the trader/investor should know themselves to achieve the most suitable conditions and minimize the downfalls.
Emotions:
Most traders experience an ego feeling when generating a sequence of profitable trades, feeling that they have mastered the job until this euphoric feeling ends after some losing trades start eroding profits. A significant loss of trading capital can push traders into a vicious cycle of anger, trying to compensate their loses by taking irrational trading decisions that incurs additional losses. Ideally, traders should follow a disciplined trading strategy. One that includes certain criteria at which the trader decides either to enter or not to enter a trade, position sizing and stop loss criteria.
Number of Positions and Position Sizing:
The market is full of trading opportunities beyond the traders’ time and mental capacity to trigger, decide and monitor. Opening too many positions that require attention simultaneously will lead to mental distraction and will be destructive to your position, since the human brain has limited capabilities, potentially leading to poor decision-making. Of course, nothing would be more attractive to a trader than a winning big position with a high return. However, there is no guarantee that the market will follow your analysis. So, if a trader risks 50% of his capital in one trade and this trade turns against him, it will significantly lower his trading capital, thus affecting the trader’s psychology. Traders should allocate their positions in reference to the risk/reward ratio, security volatility & time horizon.
Leveraging:
One of the biggest trading mistakes is over-leveraging, especially with those who don’t know how leverage works. Trading with high leverage can easily wipe out your account if trades start moving against you. So starting with low leverage is highly advised at the start. Once traders become acquainted with the low leverage, they can begin to gradually increase their leverage.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable; however, CFI makes no guarantee of its accuracy or completeness and accepts no responsibility for any consequence of its use by recipients.