Avoiding some of the common pitfalls of trading could save you a lot of money in the long run and help maximise your trading profits.
It’s all too easy to make these basic trading mistakes. So, what are they, and how best to avert such mishaps?
Not taking trading seriously
It’s good to see trading as enjoyable but you also need to take it seriously. That means investing some time and energy into understanding trading and laying the right foundations rather than rushing in without doing the necessary research and preparation.
Take your time, and make sure you fully understand what you are doing before you place real money on big trades. If you take time to lay the right foundations, you’re more likely to make a success of trading.
That way, you’re more likely to enjoy being a trader in the long run.
Allowing losses to snowball
A typical pitfall for those who are new to trading is to let losses from a trade that goes wrong get out of hand. A beginner can easily fall into this trap when they keep holding on to a losing position in the hope that the losses will reverse. Rather than reverse, the losses may just get worse.
This underlies the importance of applying discipline and consistency to trading, which comes with having a credible overall trading plan and strategy.
There are several identified trading biases that can contribute to greater losses than necessary. Learn about biases (https://capital.com/top-50-cognitive-biases-list).
Trading without a stop loss in place
It seems so obvious, but most traders have probably done this at some point, even unintentionally, perhaps because they have forgotten to set a stop loss, or possibly because they are new to trading.
Putting on a stop loss should be as easy as hitting an icon with a stop-loss tag on your screen. If you’re not sure how to put one on, you should definitely make sure you learn, at least before you start trading for real money.
Implementing a stop loss means you are effectively drawing a line in the sand on the potential losses from any given trade.
Failing to adequately control your losses from trading means that you could see all your profits or even your entire trading account value wiped out by just a few trades that go wrong.
With stop losses in place, we gain peace of mind, but also the ability to implement an effective trading strategy that could be highly profitable over the long term.
Stop-loss orders play a vital role in a trading strategy: to be profitable you need to make sure that either a higher proportion of your trades are winners than losers, or that your profit target on each trade is higher than your potential loss.
In an ideal world, you could manage to achieve both these latter aims. Never be tempted to move your stop loss when a trade doesn’t go your way.
Learn more about stop losses (https://capital.com/understanding-the-importance-of-stop-loss-orders).
No trading plan
Having a trading plan in place should impose discipline on your trading and avoid spur-of-the-moment decisions that you quickly come to sorely regret.
The plan should answer the why, when and how of trading, allowing you to define which trades you should take on, as well as the level of your stop loss and profit target for each trade.
If a trade doesn’t meet the criteria of your trading strategy, then you should not take it on.
Over the longer term, trading decisions taken in the heat of the moment that don’t meet your own pre-specified rules are likely to significantly detract from your trading profits.