As an active trader and instructor at Online Trading Academy, I’ve seen a lot of common mistakes over the years. Here are a few of the most frequent, and how new students can work to avoid them.
1. Not having a plan
Can you imagine building a house without a plan? Just tell your contractor that you want a 3-bedroom 2 bath house. I guarantee you it will not be what you wanted! It may come out as a 2 story, no foundation, no kitchen… the possibilities are endless. By having a plan, you are mapping out how you plan on attaining your goals. If you fail, you can go back through your plan and modify what was not working and try again. If you don’t know where you are going, any path will lead you there.
2. Buying the wrong stock
If you hit the wrong button or typed in the wrong symbol, don’t exit the trade just yet. Quickly make an assessment (you might just make money!) to determine if the trade is going for you or against you. Next, determine the best manner to get out of the trade? Is there enough volume? What is the spread? If you have the right trading platform, you can check the recent transactions to see where the buying and selling is occurring. If it is going up, let it run, until it reaches the next quality supply zone. If it is not going your way, exit quickly. Do not waste time rationalizing or justifying the trade.
3. Panicking when the computer system goes down
No system is immune to occasional bog-downs. Whether the source of the problem is your internet connection, your trading software, or the brokerage, avoid trading until it is fixed. If you had an open position, do not panic. You will not only cloud your judgment, but you may also make a fool of yourself. Know what open positions you have and write them on a piece of paper. If you really want to get out of the position phone your broker and have them close out the trade for you. For this reason, it’s important to have a list of your important contact numbers (Broker, tech support etc.) written down on a piece of paper near our computer, NOT on the computer. If the power goes out, it won’t do you any good, so write them down.
4. Waiting too long to sell
Many traders have a problem closing out a profitable trade. They get greedy and try to hold out for as much profit as possible. This may lead to you losing a large portion of your profits! Taking a profit should not be an arbitrary decision, it should be a planned one. We teach trade management which requires you to define your rules for what to do when you’re in a winning trade. This involves stop loss adjustments, trailing stops and utilization of supply and demand zones to anticipate changes in price direction. Don’t end up saying, “I should have sold when I was up.”
5. Holding on to a losing trade
A bad trade is like a bad relationship. It’s not working, so stop the torment and move on! Exit the trade for a small loss and move on to the next. Chalk it up as a cost of doing business. What you can’t do is let that small loss turn into an account killer! Remember, all big losses start out small!
6. Trading in a situation where you cannot concentrate
Trading requires you to be focused and clear headed. If you have children running around, you’re in an argument with your partner, having a bad day, then don’t trade that day. It is better to pass up the trade than to make a mistake and end up losing a substantial amount of money.
7. You’re having a bad trading streak
Anyone who says they haven’t lost in the markets, has never traded! Everyone loses at some point. The key is to identify when that losing momentum is against you and put a stop to it. It’s important for you to set “circuit breakers” for you when you start losing. For example, if I have 3 losing trades in a row, I will take the remainder of the day off. If I have 3 losing days in a row, I will take the next two days off from trading to regroup. Why do this? 2 words. Revenge Trading! Many traders will try to get that lost money back and that usually entails more risk. More risk can lead to greater losses, so stop the insanity before it gets out of hand! The short breaks are there for you to reevaluate. Step back, relax and see what you did wrong. Avoid trading to “make back the money”. Always remember to take it one trade at a time. That last loser shouldn’t influence your next position.
8. Over Trading
Trading can become addictive. The need to be in trades simply because you are sitting in front of your computer is a strong one! At my peak back in the late 90’s I was averaging 550 trades a day! Looking back, that was insane. The broker certainly liked it! Today however, we need to be selective, focuses and precise on the trades we take. I like to tell students to think of it like bullets in a gun. If you only have 6 shots, you’re going to be much more selective on how you use them. And if you fire off all 6, then you’re done! Of course, the number of trades you make in a day, week or month is totally up to you, try to define a max number for you. If you hit that number, then you stop trading.
Overall, most novices just don’t know the rules of the game. If you’ve never played chess before, and you play a pro, you’re just going to lose. Same thing in trading. Learn how the game is played, practice, get educated and if possible, mentored from someone who had been playing the game a long time. Learn from their mistakes so you don’t make them! Everyone will make the same mistakes. The hope is that by understanding when they are in a bad situation, a novice trader can take the appropriate action and prevent a major loss from occurring.