3 Trading Mistakes to Avoid at All Costs

Learning on the job is a key part to success. Nothing beats experience but if you can avoid making these three basic mistakes in your trading, you’ll find yourself ahead of the game.

When you make a mistake, there are only a few things you should ever do about it: admit it, learn from it, and don’t repeat it.

Paul ‘Bear’ Bryant – head football coach at University of Alabama.

How do you feel when you make a mistake? This could have happened during work, with family, during social or even with your partner.

Remember that sinking feeling? That dawning realisation that something has gone badly wrong and, well, it’s kind of your fault?

I’m sure you do.

Let’s be honest, things can go wrong, mistakes can happen and, as Coach Bryant says, there are some key reactions that will bring you through the other side and back on track. It’s also fair to say that some mistakes are arguably worse than others and it’s far preferable to take responsibility for and move on from these errors of judgement than find yourself drowning at the more severe end of the spectrum.

Well, this is no different in trading. Because mistakes will happen.

With that, here are three of the more basic trading mistakes that need to be avoided:

1. Heart Over Head

Or to put it another way, not going in with a clear plan. Some may just call it “rushing over it”.

If you’re someone who’s spontaneous in many areas of your life, it’s time to reign that exuberance in. You might be fun at parties but buying up with no clear goal or plan is a recipe for disaster.

New traders are far more at risk of this than the more experienced but there are times when even the most disciplined trader can be swept away by emotion.

Further more, most traders know from experiences that it’s rare that a buy will increase straight away. And a sell, could go the other way.  More importantly, experience tells you when it’s the right time to ditch and run.

Inexperience might see you grasping hold the buying position, refusing to admit defeat and watching the price steadily tumble and you with no clear exit plan. On the flip side, you might find yourself on the up but afraid to sell in case you miss out on an even better deal. It’s a frequent mistake and one that is completely avoidable.

Reassuringly, there’s plenty you can do to avoid getting into this unenviable position. For a start you need to know your limits and how much you’re willing to lose. You’ll also have your targets. Not outlandish, unrealistic and risk-heavy targets but steady and achievable with risk that can be easily managed.

You know this right?

Even so, you’d be surprised at how many, of even the most experienced traders, forget the basics and risk huge drops in profit with no return.

Don’t be that trader. More importantly, learn to manage your emotions – read more here.

2. Taking His “Word” for It (But Not Your Own)

You know, that guy, the one who’s always got an opinion about everything? He’s loud, bossy and he claim to know it all. Or does he?

Every trading floor, every type of market, every trading platform has one. The trader who thinks they know better than everyone else and isn’t afraid to tell you what to do and how to do it.

Most of the time it’s easy to ignore him. But now and again, especially if you’re having a wobble, he can get under your skin and you find yourself ignoring your strong and mostly right gut instinct and taking his word for it instead.

Even if you don’t have this particular guy in your life, it’s easy to fall prey to strong outside forces and advice that isn’t always helpful. We’re all too easily swayed. At times, when we go looking to a trusted source, we make the right decision but there are those moments when we let less than positive influences guide our decision making and that can land us in real difficulties.

When you find your ears being pounded by advice on how to run your trade, it’s time to retreat back into your head and reflect on the following questions:

  • What are this source’s motivations to help me?
  • What is his/her track record? – Not reputation but the facts
  • What does my gut instinct say and why does it differ from theirs?
  • What’s my own experience in this situation?
  • Can I verify this advice from other trusted sources?

Keep these five questions at the back of your mind and give yourself time and space to reflect on them before you dive into following the advice of the loudest guy in the room, in the online forum or at the co-working space you’re sharing.

In other words, what does your own instinct or gut tell you? What is your inner voice saying to you?

Note: You might be new to trading or been doing it for years but learning to trust yourself is a skill that never gets old.

3. Leveraging with No Exit Plan

Like a certain ring to Gollum, leveraging can be irresistible. Trading up and out of your means is intoxicating, it’s exciting and when it goes wrong it’s an absolute disaster.

It’s not even that the trader is greedy or bad at what they do, sometimes it’s simply because things can and do go wrong and that lack of foresight means you’re suddenly plunged into a loss that could break you.

Admittedly, this isn’t always the case with someone who knows what they’re doing but if you’re in any doubt about leveraging, any doubt about the trade or don’t have a very clear plan and exit strategy – be careful.

What we see time and time again is how traders get shaken up by the how leveraging works but can very quickly turn into emotional decision making. The great swings make it hard not to use your heart over your common sense as you navigate through.

The rule of thumb here is that, unless you have the experience to back it up, always have an exit plan. Essentially, have a clearly defined stop loss position especially when you’re leveraging (see related article).

If you do, then make sure to stick to your rules and let the market do its thing.

Easier said than done. But it is what it is.

Lesson or Take Aways

Let’s be clear. There’s going to be way more than just 3 mistakes you’ll encounter throughout your career.

But that’s not the point.

Day-to-day things change, you change and markets fluctuate. What’s true one day might not be the next so staying sharp, focussed and continually asking questions is going to help steer you clear of the greatest obstacles.

But what to do when you do find yourself falling foul of any of these mistakes, or others we haven’t covered? After all, it’s fine to say “learn and move on” – that might work on the football field but when you’re trading the stakes are higher aren’t they?

The first thing to consider is letting go of ego. You may have it, or you may not have it. It doesn’t matter because it’s a lot better to assume you do.

And yes, it hurts. You feel angry with yourself and with the position you find yourself in. But you’re not getting anywhere punishing yourself, you’re not going to learn if you refuse to admit your mistakes. Coach Bryant, right again.

Admitting your mistake to others might be a harder journey but if your mistakes do affect others (and they might not), then having that conversation with a professional (or even with a friend) sooner rather than later is preferable.

Get it done.

Then, you’re next step is learning from it. Not just the bigger picture, not just the actions you took but what drove you to that point, which emotions were at play.

Some traders set up a trading diary. This useful tool will allow you to get a broader picture of the good, the bad and the could-have-gone-either-ways. Populate it, refer to it, keep it up to date.

Finally, yes. Let. It. Go. Don’t make that mistake again but don’t dwell on it. Be better, bolder and more brilliant.

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