10 Common Mistakes in Trading

What are the most common trading mistakes a beginner but also experienced trader should avoid?

I. Expecting too much

Expectation and frustration are two pairs of the same shoe. Most trading beginners expect to make a million dollar out of $1,000. One year? That’s even to slow, how about three months?

There is a saying, that 90% of trading beginners lose 90% of their money in 90 days. Too high expectations are doomed as it most likely results in the opposite. Not saying that you can’t expect to make a lot of money, just it should be somewhat in line with reality.

II. Risking too much

I wrote an article about position sizing with more details. The conclusion is to start with small risk and risk more when your trading skill increases. The common mistake is to start with 2% risk per trade, which is too high for a beginner.

III. Not having enough savings to live

While learning to trade you need to live from something. For most independent traders that would be their savings. Living in a country with lower living costs can help in this regard. How much savings you have will determine how long of a learning time you can cope with. The problem is when you’re still learning, the market is taking money from you, and you could be forced to give up because you don’t have the time and money to learn more about trading.

IV. Learn everything through trial and error

I must say that I have lived through hard trials and errors because I couldn’t really afford an expensive coach. But certainly, you don’t have to do all the mistakes others have already done. Find people who are already successful, try to meet them in person, read their books, try to understand their way of thinking to integrate it into your personality.

This way you can for sure save a lot of time and money. The best way to cut the learning curve is to have coach who is trading about the same trading style as you do and can watch you over the shoulder. Coaching is quite expensive. That’s why I made my courses affordable, because I know what a struggle it is to fight your way to the top with un under $5,000 account. It’s hard. The commissions will eat you up if you don’t perform. Most of the time it’s not easy to make money back that you lost, because you’re just a student or have no income.

V. Using too much leverage

As I explained in an article about Bitcoin day trading one has to adjust the maximum leverage depending on the volatility of the underlying. For example: Bitcoin/USD has 5% standard deviation on close-close-returns. Here, a leverage of over 1:4 can really kill you quickly.

The problem is that forex brokers or Bitmex offer leverage which is just too high. 1:100 for forex or 1:20 for Bitcoin is an overkill.

The thing that you have to think about when using leverage is your risk percentage, stop loss distance, and then leverage. For example, you want to risk 20 points maximum on the Dax CFD @ 12,000.0, the maximum risk you can cover to not get ruined over your trading lifetime is 0.5%, then calculate leverage like this: 0.005/(20/12000) = 3. You need only 1:3 leverage, and not 1:20 or 1:100!

VI. System jumping

“There are only two mistakes one can make along the road to truth: not going all the way, and not starting.”

– Buddha

This is true for trading. Starting you may do, not giving up after many months or years of struggle is the other thing. And not going all the way, meaning trading only one system consistently, can really extend your struggling time.

VII. Too many or too few trading rules

Too many rules are too demanding of the market. Having 10 indicators that have to line up is definitively too much. The market is uncertain in its nature, fewer simple rules tend to have success, going forward because they don’t demand too much of the market. I learned that especially from Kevin Davey (@kjtrading). No rules on the other side doom you to overtrade, don’t take trading seriously and lead you down a road with no trading edge.

VIII. Messing with the stop loss

A stop is placed to get you out of the market when things are not going how you expect. Moving the stop further away is hurting your risk management rules and is a habit that can give you huge drawdowns, wiping out months of profits.

IX. Trading in a bad mental state

Avoid trading when you are too ecstatic, distraught, uncertain, fearful, distracted, tired, or sick. Adhering to this simple rule can save you a lot of money.”

– Yvan Byeajee

A thought leader on psychology in trading, @yvanbyeajee, hits the nail on the head. I myself have experienced a direct correlation between my condition, health and trading performance.

X. Not journaling

I learned that mainly through the reminders of @LoneStockTrader. Journaling was the turning point for him and it’s true. It’s even sad if you don’t journal your trades, entry, exit reasons etc. because then your first months in trading will be a total waste.

Why? Because you don’t even know what you did wrong and can’t learn from these costly experiences. For day traders I recommend video journaling with a screen recorder like Apowersoft.

Leverage, Mental State, Stoploss, Trial and Error

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