Top ten mistakes made by beginning traders
Mistakes are part of life, but if we don't acknowledge that we make them, we are making another mistake. Like a race car engineer that needs to constantly learn from past mistakes to optimize car performance, you also need to constanly be aware of your past mistakes in order to adjust your trading strategies and profit from them.
In this article we are going to analyze a few of the most common mistakes made by traders who are just starting in the profession.
1. Bad risk management
A very common mistake made by beginners is to misjudge the real dimension of the risk they are taking therefore assuming a position that does not match their investment style. Always choose low volatility stocks in the beginning in order to learn how things really work and move. It is also important to learn how to calculate your risk/reward of every trade, so you can follow your plan and increase your profit potential while limiting your losses.
2. Impatience
It is quite common for the beginner trader that loses some money to try to get it back in the very same day by trading instruments they have little or no knowledge about. The market is open every day and filled with new opportunities. You will get your chance to regain your money – as long as you do not rush into it. If you lose money, be patient and live to see another day.
3. Trading trendless stocks
Beginners do not have what it takes to identify clear opportunities or highly profitable stocks. You should prioritize stocks with at least 3 clear movements during the day with intraday variations of at least 1%.
4. Hesitating in entering a trade
Many people fear that they might pull the trigger at the wrong time when it comes to making a trade, so they do nothing. Time will teach you exactly when to get in and out of a trade, but the sooner you get the timing right, the better. Typically, hesitation can happen when you are testing something new or due to not having a stop loss or profit target well defined. Learn those before entering any trade and pulling the trigger will be much easier.
5. Not being analytical
It is a great mistake not to measure your trading performance that shows where and why you are failing. Pnl is not the only metric that matters and understanding how you got your pnl is an important aspect of your trading business. A trading journal such as Trademetria is a great tool to be on top of your metrics.
6. Incorrect position sizing
Doubling down on a trade or buying a stock while it goes against you is one of the worse mistakes you can make. If the market is going against you, you are wrong, why add to a losing trade? Beware of doubling down or trading more shares than you can handle. You might not be able to handle the psychological and financial pressure when the trade goes against you.
7. Trading stocks you are not familiar with
It is very hard to trade stocks you don't know, yet beginning traders do it all the time. They buy an ipad and so they trade aapl because of it. If you do not know the players in the stock and how it moves, it is very difficult to make a profit. Study the stock before buying or selling. Learn every aspect about it, why it moves, what triggers a move, what types of ecns are involved, what the tape tells you.
8. Not paying attention to critical points
Important numbers such as support and resistance points, or prices ending in .00, .25, .50, .75 – which are used frequently by institutions during their decision making process. Pay attention to what happens to your stocks when they reach those numbers and take notes.
9. Not knowing which are the most profitable stocks
It is wrong to trade stocks based on what you think about the company instead of trading stocks that you understand. Make sure you know every month what your best stocks are and remove from your view, the least profitable ones.
10. Not following stops and exits
When you lose your stops and exits you may lose your discipline as well. Write your rules on a post-it and stick it to your pc monitor or notebook. Learn how to adjust your rules when they backfire at you or stop working. Some mistakes happen because the trader do not know better, while others happen because the trader never took the time to plan before taking the trade. Either way, the sooner you learn the rules, the better you will get at the game.
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