7 Common Mistakes New Traders Make

 

Naturally, there are many mistakes that new traders make when they start. New traders should not be hard on themselves. Every trader has made mistakes in their trading career. Successful traders learn from their mistakes and make a deliberate effort not to keep repeating them. It's important to remember that quitters never win and winners never quit. In my experience in working with new traders I have observed seven common mistakes that tend to surface frequently.

1. Trading without a plan

I can't over emphasize the importance of having a trading plan. As a business professor the first thing that I taught entrepreneurs who were interested in starting a new business was how to develop and write a strategic plan. Trading is a highly competitive and risky business, no one can survive the trading business without a well thought strategic plan. I have never encountered a successful trader that did not follow a strategic trading plan. I understand that it can be difficult for someone new to trading to develop a decent trading plan, a successful strategic trading plan requires an understanding of the financial markets and how to trade them. These skills can be acquired through a solid education along with market experience. The absence of the knowledge and experience to develop a strategic trading plan can never be used as an excuse to trade without a plan. Trading without a strategic plan is a losing proposition.

2. Trading with money they can't afford to lose

Personal psychology influences our thinking and decisions about money. A trader should never risk money they can't afford to lose. Certainly, no one wants to trade with the goal of losing money but one must be ready and prepared for such an outcome. This is why once again a strategic trading plan is critical because it helps you to set and define your risk tolerance, risk management strategies and it provides you with a way to evaluate and measure your progress. Just as no one should ever trade without a well thought strategic plan, no one should ever trade with their rent money or any money they cannot afford to lose.

3. Trading without a proper education

Trading is a "risky business" and requires a coherent understanding of financial markets and how they work. It's impossible to achieve consistent long-term success in the market without first understanding the market. Some simply prefer to learn by paying the market for their mistakes. This is a foolish and expensive way to learn. There are many much better ways to properly learn to trade for far less than what the market charges for ignorance. Select your schools carefully, make sure they will offer you a well-rounded education. Don't try to learn too much too fast, take your time; develop your knowledge and skills at your pace.

4. Failing to cut losses short

Everyone loves to make money; naturally everyone hates to take a loss. New traders are often victims of their own emotions. They have not learned to develop the discipline required for the "trade terminator" to take action. They will pray, wait and hope, they will search for every excuse in the book to stay in a losing trade to avoid the pain of the loss. While trying to avoid the pain and agony of a small loss, the losses accumulate and continue to mount. Learning when to terminate a trade and developing the "trade terminator" instinct are essential prior to any live trading. Once again with a strategic trading plan, your plan should clearly indicate for you when to get out of a trade, just as it should guide you as to which trades to take.

5. Failing to let winners run

When that beautiful green appears on the screen, who can resist the temptation of quickly grabbing it? Especially when you know that it can quickly vanish before your eyes just as it appeared. Take the money and run is the normal instinct of any new untrained trader. Unfortunately, that is not the proper way to trade. Once again emotions are running the trade or more accurately ruining the trade. There are strategies to mange position size to avoid these emotional traps. This is another important reason why every trader must have a proper trading plan and learn to develop the discipline to follow their plan.

6. Trading without adequate paper-trading practice

Paper trading is the process of actually placing simulated orders on a "demo" platform not using real money to trade. With the proper guidance and training many important skills can be developed using paper trading. The one challenge that paper trading never teaches is the ability to control emotional reactions that occur when trading with real money.

Many new traders don't know how to use or learn from the paper trading experience. Frequently, paper trading offers generous profits that are not realized in the real market. At strategic trading I have developed a number of structured exercises for beginners to properly use paper trading and to record and analyze the results before they ever start trading with real money. It's important to properly learn to use paper trading to your advantage, take your time and don't enter the market until you are properly trained and ready.

7. Failing to maintain a proper trading journal

A trading journal is an important learning tool for any new or experienced trader; it allows them to evaluate their actions, patterns of behavior and trade outcomes. It provides data on whether their trading plan is producing the desired results or not. It helps assess whether a trader has developed the discipline and skills required for successful trading. As important as the journal is, I'm amazed at how many new traders choose to work without it. At strategic trading, it is a mandatory requirement for all strategic student traders to complete and submit their daily trading journals every week to the instructor for a progress evaluation. This provides students with extremely valuable feedback and helps them to see areas of weakness and identify skills that need to be developed. Trading is a craft that requires great discipline, skill and knowledge. However, once mastered it can truly be a life changing experience.