The best traders learn from their mistakes and try not to repeat them over and over again. Great traders do stick to trading strategies that perform well and abolish quickly the ones that are losing them money. In this trading essay, I will try to enlist five of the most common trading mistakes that you should at all costs try to escape. They are:
1) Reluctance to get out of losing positions
Let’s start off with the first bad habit that a lot of traders share.
One of the most common trading mistakes is to hold on to a losing position for too long. Traders are ignoring their hard stops and let the losers get into the red zone for too long time. They are hoping that the price will eventually come back to a break-even point. Unfortunately, markets do not work this way. That is why traders should have either psychological or hard stops in place. If not, they are risking losing their capital too fast. You should not take a position too personally! You should be disciplined and control your emotions, so if you notice you are getting too angry with your trading, you should immediately stop (or get out of a position).
2) Shorting when the trend is up
One of the worst trading habits is when you are preoccupied with a bias and go against the natural direction of the market. In other words, you are trying to outsmart the market. In my opinion the best way to trade, no matter short or long-term is to go with the trend. Too much information is definitely going to do more harm than good. Reading all the financial journals and news hubs won’t make you a profitable trader. What you should learn is how to apply price action and go with the trend. Awareness of a personal bad habit is the first step in gaining control over it. You need to be as flexible as possible and don’t take all possible trading signals. You should be sieving through only the best trading signals. It is definitely more complicated than merely having an intuition about the direction of markets.
3) Emotions-based trading
Most of the traders I know do rely on their instincts and much of their trading, especially when it is stressful, is built on efforts to keep emotion under control. Trading to win takes a lot of discipline, persistence and a plan to win. Taking trades only based on hunches instead of careful application of a trading method is what I call emotion-based trading. You should try to stay away from that type of trading at all cost. Some of my students are constantly asking me how to improve their trading results. Apart from the fact that it is almost impossible to teach that, I tell them to erase all emotions. It is easier said/written than done, but once you realise this yourself, you are one step closer to financial freedom and trading success. You should erase thoughts like “I feel lucky”, “today, I am having a good day”, “I lost a lot, better size up”, etc. from your brain. Super-traders don’t grow complacent, but keep aiming to upgrade their game. They center on the process and not just the result.
4) Overattachment to current positions
You should not trade based on what you like and you don’t like. You should trade based on what works and where price action is showing a good risk/reward ratio. Overattachment is another bad habit that I have met in a lot of traders. What they usually do is stay with a current position for too long- no matter whether it is a losing or a winning position- if price is showing that the trend is about to change direction, you should immediately take profits/losses. In the end, the small profit or loss is not what matters- it is the homerun.
5) Selling too soon
One of the most difficult aspects of trading is to know when to take profits. It is not only hard because you don’t know how much more price will rise, but because most of the times you just want to close down a certain amount of pips/dollars. This is where a lot of traders got it wrong. They believe that by just having a 1:3 risk:reward ratio they can make their trading dreams come true. For me a true edge is when you can return multiples of what you have risked- like 5-10-20 times. There is no easy way to do that and even super-experienced traders find it extremely difficult. One of the best ways I have found that works best for me is to look at my P/L. As long as it is constantly showing an increasing figure, it means that there is what more to get out of a trade. But once it starts flattening out or decreasing dramatically, it means that you should start considering getting out. It is not an easy decision, but if you don’t have a proof from the P/L you’d better take your profits. On the other side, you should at all costs escape from selling too short! If the P/L is growing, there is no reason to sell. The only reason would be your greediness or fear. If you want to become a super-trader, you will need to learn how to control those emotions. You just need to hold on…