WORST MISTAKES OF NOVICE TRADERS
Having No Trading Plan or Sticking to One. A well-defined plan is the "formula" of seasoned traders. It has a precise entry and exit points, the amount of capital to be invested in the trade, and the maximum loss they can take, among others. Most beginner traders tend to not draft a trading plan before they start trading. Even if they have one, they may abandon it unlike experienced ones in case things do not go their way. Or they may reverse course together, only to end up getting whipsawed.
Failure to Set Stop-Loss Orders. Not implementing a stop-loss order is one of the worst mistake a trader can be made. Tight stop losses normally ensure losses are constrained before it becomes sizable. Yes, there may be instances a risk in stop order on long position may be implemented at levels way below the specified if the security gaps lower. But the benefits of such orders overshadow this risk. One of the common aftermaths of this trading mistake is when a trader cancels a stop order on a losing trade before it can be triggered because he believes the security will change course imminently and allow the trade to still be successful.
Letting Losses Mount. Successful traders know how to take a small loss swiftly if a trade fails to work out and move on to the next trade idea. Ineffective traders are inclined to stop if their trade goes against them. Instead of capping their loss, they hold on to a long position hoping it will eventually work out. And aside from linking their trading capital for an inordinate time period in a losing trade, such inaction may result to mounting losses and severe depletion of capital.
Averaging Down (or Up) to Regain Losing Position. This technique, when applied on a long position in a blue-chip, works for investors with long-term investment horizon. But those who are trading volatile and riskier securities, it can be teeming with peril. Some of the biggest trading losses have surfaced because a trader keeps adding to a losing position; hence, he will be forced to cut the whole position when the extent of loss has become substantial, making it no longer bearable to hold it. Or it could be the bosses discovered the true extent of the loss. Also, traders go short more often than traditional investors, and they are averaging up because the security is advancing, not declining.
Excessive Leverage. Leverage is a double-edged sword since it can amplify returns for lucrative trades and aggravate losses on losing trade. Especially in forex, beginners may be overwhelmed by the level of leverage they hold, but may soon discover too much leverage can abruptly deplete their trading capital.
Trading Too Frequently. Hippocrates said, "Everything in excess is opposed to nature." Let us apply this in trading. This can erode returns to the point in which profits turn into hefty losses. Veteran traders learned the hard way too much trading can severely dent overall returns and performance. Take it from there.
Going with the Herd. These new traders are used to exiting traders when they get too crowded. When new traders blindly follow the herd, they either end up paying too much for hot stocks or may set up short positions in securities that have plummeted and may be on the edge of reversing. However, they may stay in a trade long as the smart money has moved away.
Skipping Homework. Oftentimes, majority of rookie traders skip due diligence before trading. Since they do not have adequate knowledge about seasonal trends, trading patterns, and timing of data releases, among others, it is important for new investors to do their homework. And not doing so can result to huge losses in the end.
Trading on Several Markets. Many neophytes leaps from market to market, to forex to commodities to stocks to bonds, for instance. But trading multiple markets can distract a beginning trader and may prevent him from gaining the necessary knowledge and experience to shine in the market.
Overconfidence. Being overconfident is dangerous because it encourages excessive risk-taking and cultivates complacency, which can lead to trading disaster. Trading is a demanding occupation; therefore new traders should not consider this as a quick, short road to riches. In order to become a successful trader, one has to map out a well-defined plan, have patience and perseverance, and allocate ample time.
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