8 Common Mistakes Traders Make and How to Avoid Them

Trading can be profitable, even for beginners, provided they stick to proven strategies and avoid problematic losses. However, it is easy to make mistakes, such as:

How many times have you perfectly timed a trade and seen a profit vaporise before your eyes? This happens to traders of all experience levels.

1. Taking Too Much Risk

One of the biggest mistakes traders make is taking too much risk. This can lead to big losses because if the trade goes against you, it can wipe out your entire account. It is important to learn position sizing techniques to reduce your risk. Also, don’t try to make up for a loss by trading in another market – it is better to wait for the right opportunity that meets your trading criteria.

Inexperienced traders often jump from market to market, trying to catch the next trend. But this can be dangerous as each market has its own characteristics that can affect your trading strategy.

Successful traders understand that it is impossible to win every single trade. Even the best traders realize losses on a regular basis. However, what separates great traders from those who struggle is how they manage these losses. Many traders fall into the trap of increasing their stop loss after a losing trade, which can lead to bigger losses. Instead, try to analyze what went wrong and learn from your mistakes.

2. Taking Too Many Trades

While the mechanics of trading may be simple (a click or two gets you in, a click or two gets you out), the decision-making process is more complicated. That complexity creates opportunities for mistakes to occur that can hurt your bottom line.

Taking too many trades can lead to impulsive trading, which can cause you to miss out on potential gains and increase your risk. This can also lead to behavior risk, which is when you act emotionally and make irrational decisions, such as hanging onto losing positions for too long or quitting profitable ones too early.

Another mistake is scaling up your position based on one-off scenarios or results from a single trade. For example, if a stock doubles in value in one day, it is irrational to dramatically increase your leverage. Instead, keep track of your gains and losses in a detailed trading journal and only scale up if the data backs you up. The goal is to minimize your losses and maximize your gains. Remember, even the best traders lose occasionally.

3. Not Having a Strategy

If you dive into trading without a strategy, it’s very easy to find yourself overexposed and in the red. This can be a problem because it will take a lot of profits to get back to even, and it could lead you to believe that trading is just gambling instead of a way to build wealth. To avoid these problems, create a clear trading plan before you start and make sure to set up your account with the proper settings and risk tolerance. You can learn about prop trading firms that might help you decide on which firms you can consider.

Once you have a strategy, stick to it. It’s also important to remember that no trade lasts forever and that markets are mostly random, so you should expect to have some losing trades. This will help keep you grounded and prevent you from making the common mistake of revenge trading, which is when you try to make up for a previous loss by changing your trading plan or increasing your position size. This is a dangerous trap that can lead to large losses. Instead, just stick to your plan and learn from your mistakes.

4. Taking Trades Based on Emotions

One of the biggest mistakes that traders make is taking trades based on their emotions. Whether it is fear or greed, trading based on your emotions can lead to poor decisions and costly losses.

Emotions are important, but they need to be controlled when trading. When emotions like fear or greed take over, it is important to step away from the market and reassess your strategy. This can help to prevent you from making bad decisions and wasting your money.

It is also important to remember that you cannot control the markets, and they will often go against your expectations. This can be frustrating, but it is important to accept this and not get angry or disappointed when a trade doesn’t work out.

Another common mistake is assuming that you can predict or influence the markets. This is known as the illusion of control bias and it can lead to overconfidence and excessive risk-taking. To avoid this, try to focus on learning from your trades, both good and bad. Also, try to change the narrative that you give your emotions, by naming them and putting them in a different context, this will allow you to see them more rationally.

5. Following the Crowd

A common mistake that many new traders make is following the crowd. This is when they take a trade based on a gut feeling or because they heard a tip from someone else. While this can sometimes yield results, it’s important to always back your decisions up with research and market analysis. Otherwise, you could end up suffering a big financial loss.

In the short term, following the crowd can lead to profitable trading as the publics behavior seems to confirm your own system of analysis. However, in the medium to long term this is one of the most dangerous situations for an individual trader. Over time it will lull the trader into a false sense of security and will give increasing credence to the groups decisions.

Large herd instincts are a well documented reason for bubbles and crashes, going all the way back to the 1636-7 Dutch phenomenon known as Tulipmania. They have led to the subprime mortgage crisis, dotcom crash, and the 2008 Great Recession among many other financial disasters.

6. Jumping from Market to Market

The trading world is complex, but it doesn’t have to be overwhelming. Beginner traders can set themselves up for success with the right tools, education, and preparation.

Trading without a plan can lead to impulsive trades and significant losses. Even seasoned market participants can make this mistake. To avoid this, take the time to develop a trading plan before entering into a trade.

Many traders jump from one market to another based on their gut feeling or on tips they receive. While these sources can sometimes yield results, they should be backed up with research and market analysis before opening or closing a position.

Fear of missing out (FOMO) is a common reason why traders stay in bad trades longer than they should. When FOMO sets in, it can lead to chasing trades past their entry levels, which leads to late stops and more overtrading. This cycle can be stopped by cutting exposure to the markets as soon as you recognize it and making a clear break for a few hours, a day or a week to regain control of your narrative and tolerance thresholds.

7. Taking Trades Based on Trends

Trading isn’t the sort of thing where you can casually throw in a few thousand dollars and reap untold riches – it takes real skill to get anywhere close. The good news is, if you’re aware of the common mistakes traders make, you can avoid making them yourself!

Trend trading is a great way to increase your chances of winning trades and improve your risk-to-reward ratio. However, if you’re not careful, you can end up overtrading. This happens when you take too many trades without proper research or risk management techniques. Overtrading can also lead to overexposure, which amplifies losses and can cause you to lose faith in your strategy.

It’s easy to become overexcited when you’re seeing your trades making big profits, but it’s important not to forget that every trade has a chance of losing. Instead, focus on managing your losses and sticking with your approach – even if you realize that you’ve made a mistake. It’s better to admit your mistake early than let it ruin your entire trading career.

8. Not Having a Plan

Trading is a complex process that requires much more than just clicks. It involves an in-depth decision-making process and emotional elements that can make or break your profit potential. For this reason, it’s important for beginner traders to have a solid plan in place before they begin trading.

Having a trade plan can help you stay focused and avoid making impulsive decisions. It can also help you track your success over time. One of the best ways to do this is by using a trading journal.

Beginner traders often start trading without a plan in place. This can lead to a lot of mistakes. For example, they may not have a clear understanding of how to use leverage or how to read a chart. They may also make the mistake of copying another trader’s approach, without taking into account their own specific circumstances. This can be a costly mistake because each trader is different and their strategies are likely to differ. This means that trading with someone else’s strategy might not be profitable for you.