Trading: the 10 beginner’s mistakes you need to avoid!
Just like any activity, getting the hang of trading takes time. Trading blind, with no knowledge, can make a nasty dent in your savings. Putting all the theory to one side, there are certain practical elements that you need to take on board. Trading debuts are often difficult, so it is a good idea to avoid falling into these few traps.
Here are 10 common mistakes made by beginner traders – to be avoided at all costs
1. Being impatient
Learning to trade takes time, and then some! It's quite normal for your first trades not to perform well. Some traders will get dispirited and decide to throw in the towel after a few unsuccessful weeks or months. And it’s a shame, because making mistakes at the beginning enables you to gain experience. The moral of the story is to be patient. With patience and good strategy, you’ll gradually get good results.
This point slightly overlaps number one above. Most beginner traders who are impatient tend to adopt a scalping strategy, and vice versa. Scalping means you buy and then sell almost immediately in order to take advantage of small market movements. Positions are held for a few minutes only. All the statistics show that it is very difficult for a private trader to make money with this method. Yet this is often what beginner traders do automatically. Amateurs tend to want to make a quick profit and so buy and sell quickly. This is, however, a disastrous strategy in the long run. In the world of professional trading scalping is the domain of robots programmed to make these high-speed round trips. The beginner trader is at a complete disadvantage to start with, before even considering the possibly inflated transaction costs and spreads that are added to the mix.
3. (Over- and unwitting) use of leverage
In connection with scalping above is leverage. Scalpers use leverage to maximize their gains. Since they trade on very small market movements, they need to employ leverage to make a profit. Even more dangerous than scalping, excessive use of leverage is one of the leading causes of mortality of novice traders! Investing more money than you actually hold in your account means that your profits may be far larger and come far more quickly (impatience...), but so might your losses! Any serious trader will tell you that leverage is a lethal weapon, and not for everybody.
4. Taking up too many positions at one time
A trading debut, when everything is new and you make your first ever trades, is a very exciting time. You want to process everything, try everything, use leverage, and do everything quickly, on all Forex pairs, all commodities, all stocks, on indices, and cryptocurrencies... In short, beginner traders sometimes find it difficult to focus and concentrate. What happens is a beginner will tend to take up several positions at once, without necessarily knowing why they are doing it. It is hard to follow a large number of positions. If you take up more than 5 trades on different products, it is worth stopping and asking yourself whether you can justify what you are doing.
5. Adding to a losing position
The first rule of risk management is probably the following: never add to a losing position. The trader who does this figures that if they add to the losing position, they can bring the average cost (cost price) of the position down. But by doing this, the losing position becomes even "heavier". If the market continues to go against the position, the trader’s losses will get bigger and bigger, and the trading account (the margin) will get depleted faster.
6. Closing a winning position too early
In the same way beginner traders tend to keep a losing position open too long, the same psychology tends to make them close a winning position too soon. They want to be certain of how much they’re going to make, and prefer to leave uncertainty hover over what they’re going to lose. High-performing professionals operate in the opposite way. They want to know exactly how much they are going lose (risk management) and leave the door open for winnings to keep on coming. When a trade is winning, the best advice is to let the market evolve because you can’t know how far it will go. And in trading, the real money is made on big market movements. Closing winning positions prematurely is the best road to failure.
7. Wanting to recoup your losses at all costs
When a trade makes a loss, who wouldn’t be eager to earn that money back by making a profit? It is an almost primal reflex and perfectly understandable. It also, however, often means we’re far more likely to take bigger risks. Not only do we want to get back to where we were before we made a loss, but we also want it now! It’s a typical reaction and inevitably leads to ruin! And points 5 and 6 above, along with this one, are all linked to the next point.
8. Acting on your emotions
Unfortunately, traders are only human. And novice traders are very human! Their actions are governed by their emotions: fear, anger, joy, sadness, surprise, disgust... They make a winning trade and they go crazy. Then they make a few losses and start to doubt everything. This isn’t the way to trade; a trader needs to be a well of calm and serenity! People often say you should only trade when everything is going well in your life. If something is bothering you, you won't have the headspace to have a clear idea of what you are, or should be, doing and won’t be able to concentrate. When this happens, you'll get impatient and make mistakes. In short, what you need to do is become a robot version of yourself, so your emotions don’t influence your actions.
9. Using your sole intuition (trading with no strategy)
Only professional traders with over 10 years of market experience should be relying on their “instinct and intuition” to trade. And even for them, these hunches should only be used insofar as they form part of a structured method, a strategy that has been created, thought through and tested. It is essential to know how to devise a method and stick to it. This prevents you making huge mistakes. The simplest method, yet still an effective one, is to have a checklist. Before entering a trade, you need to tick of all the items on the list. It pays to always be clear on the reasons for your chosen position in a market.
10. Having no knowledge of the asset you are trading
If you're buying oil when you know nothing about this market, you are almost certainly heading for a fall. Trading isn't solely about technique or graphs. You need to take an interest in who the market stakeholders are, in the fundamentals, in supply and demand, etc. Warren Buffett states the only companies he will invest in are ones that he understands the business model of and that are part of a market he knows all about. Be it in relation to investment or trading, the same rule applies. And the markets are big enough with enough products for you to at least find one or two you're familiar with.
To ensure you avoid making any of these 10 beginner’s mistakes, why not have a risk-free practice run via a virtual account, or demo account as they're called. These accounts are what they are, and best not to have too high expectations of them; virtual trading is very different to real trading. But nothing is stopping you taking your first tentative steps with a demo account where there is no risk to your capital!
Finally, whatever happens in your trading career, do treat the market with the respect it deserves. You aren’t smarter than everyone else and the market will always have the upper hand, a fact it will regularly remind you of!
Last Update on 05/08/19