The most frustrating part of trading is losing money when you know you didn’t have to. It’s not the normal statistical loss that hurts, it’s the ones you could have totally prevented; entirely your fault. These are the losses that are the result of trading mistakes. You need to learn how to prevent them, because the key to long-term trading success is preserving your risk capital so that you can take advantage of the high-probability trade setups when they arise.
Today’s lesson is going to discuss some common mistakes that traders make, which inevitably lead to losing money, and provide solutions to those mistakes. I know what the solutions are because I have made all of these mistakes on my own trading journey. I know what you’re going through, how it feels and how to help you dig out of the rut. So, let’s get this show on the road…
- Mistake: Thinking too much
One of the most common mistakes I see traders making, is simply thinking too much. People tend to make trading much harder than it is. I get emails nearly every day from traders who clearly are over-thinking the market and making things more complicated than they need to be.
- Solution: Stop thinking so much
Analysis-paralysis is something I discuss in-depth in an article I wrote titled “A Cure for Trader’s Analysis-Paralysis”. Reading that article will give you some good insight into how you can stop thinking so much and start trading instead. Obviously, in the early stages of learning how to trade, you will need to spend more time studying a course and studying the charts, so that you can develop your trading strategy and trading plan. But, once a certain level of proficiency has been achieved, it’s time to take off the ‘training wheel’s, build a trading plan, and start trading. Just remember, stick to your method, keep it simple, and block out all other external influences. Also, stick with your trades, don’t second-guess yourself; if you’re following your trading plan, you need to see each trade through without micro-managing or doubting them.
- Mistake: Trading too much
Over-trading is sort of the opposite of over-thinking, in a way. Over-thinking usually leads to not trading much, if it all, because you think yourself right out of perfectly good trades. Whereas, over-trading means you probably aren’t thinking enough. You haven’t put the time to learn how to trade properly, build a proper trading plan, or perhaps you are just so greedy that you don’t have the patience to wait for your trading edge to appear in the market.
Whatever the cause, trading too much can be a very quick route to blowing out your trading account.
Here’s an actual email I got from a trader asking me a question, but also indirectly telling me he is trading WAY too much:
“Dear Nial, I want to know if I should exit a USDJPY trade I am currently in, as I am also in 5 other trades of pairs I think may be correlated. Thanks, Dan”
This guy is clearly over-trading. I am typically only ever in one trade at a time, because there really is no point in being in more than that. Holding multiple positions at once only makes sense from a long-term “buy and hold” investing standpoint. Or, perhaps if you are trading very different instruments, like say a Forex pair and a commodity future. But, typically, beginning traders being in multiple markets at once, means they are over-trading and probably over-leveraging their accounts.
- Solution: Understand that you don’t need to trade a lot to make money
The best way to understand the solution to the problem of over-trading, is to read an article I wrote on the matter. The title is High-Frequency vs. Low-Frequency trading, you should check out to learn more.
- Mistake: Risking too much
Risking more than you can mentally afford to lose at any one time, is a death-sentence in trading. Now, the key in that last sentence was “more than you can mentally afford to lose”, what do I mean by that? I mean, you need to really stop and look at your finances and determine how much money can you realistically afford to lose on any given trade. This means being honest with yourself, not ignoring things like credit card debt or student loan debt, etc. The more you risk per trade, the more emotional you will get once that trade is live.
- Solution: Know how much you are OK with losing
As a beginning trader, especially, it’s important you start with very small amounts of real money so that you can ‘ease’ yourself into the emotional battlefield that is trading. You need to know what your ‘uncle’ point is; the point at which you can’t mentally handle any larger of a draw down, and that is the dollar amount you need to set as your 1R risk amount.
- Mistake: Worrying too much about money (what to risk, profits) before knowing how to trade
Here is a recent email I got from a trader who clearly is ‘putting the cart before the horse’ in regards to his trading:
“Hi Nial, I am a new trader, I want to know how much I should risk per trade, I have $3,000 to risk. Also, I hope to make money in the market so I can get your course soon. Cheers, Stan”
OK, most of you have a good idea of what is wrong with the above statements in Stan’s quote. But for those of you who don’t, let’s discuss. First off, you should not be worried about “how much to risk per trade” if you’re a “new trader”. It simply makes no sense. You must first learn how to trade from a reputable source, and then you will need to spend some time demo trading and ironing out a trading plan, before you even think about risking real money in the market.
Traders who start risking money without having learned how to trade, inevitably lose all that money. Also, someone saying they are going to “make money trading to buy your course”, is like trying to fly a Boeing 747 before having gone to flight school; if you try it, you’re probably going to crash, and if you try trading before getting a trading education, your trading account is going to crash.
- Solution: Forget about the money for now, get the training
Instead of worrying about money and profits, worry about learning to trade. Worry about mastering the hell out of your trading strategy and becoming the absolute best trader you can be. By doing so, when you’re ready to trade real money, you will be light-years ahead of someone who doesn’t put in that early work, often called “paying your dues”.
In regards to thinking you can make money trading to buy a trading education (that teaches you how to trade, lol), well hopefully you can see how silly that sounds. There is nothing in life that you can succeed at before you have had any serious training with.
- Mistake: Chasing the market after missing a signal
Often, traders will try chasing a market after missing a trade they were eyeing. What I mean is, they jump into the market after the trade has already taken off without them on-board. They do this because they feel regretful for not taking that trade and mad they didn’t listen to themselves. The problem here, is that doing this will get you in at a very bad price, requiring a wider stop loss and smaller position size, it’s simply less-likely the trade will work out for you if you chase the market like this.
- Solution: Wait for a second-chance entry
The solution is to simply not chase the market if you do miss a signal. You need to wait patiently for what I call a second-chance entry opportunity, because usually one will present itself. For more information on how to do this, check out an article I recently wrote on how to get on-board a trade you initially missed.
- Mistake: Not trusting yourself
Not trusting yourself or not believing in your trading abilities are big problems for many traders. Trading is something that, as mentioned earlier, is easy to over-complicate. People tend to think trading is ‘very hard’ or something that involves a lot of difficult math. But these beliefs simply are self-defeating ideas that contribute to low trading confidence in one’s self.
It is a big mistake to not trust in your trading strategy and your trading plan, because these things were learned and developed (I hope) when you were not a trade and thus at your most objective and level-headed. So, the emotional you (when you’re in a trade) must rely on the plans and ideas you formulated when you were not emotional (trading plan, etc.), and you have to trust in that and not waver in your self-confidence.
- Solution: Learn to trust your gut
You simply need to learn to trust your gut in trading. Everything you’ve learned and all your trading experience contribute to your ‘gut feel’ in the market, and so you need to listen to that and learn to rely on it.
- Mistake: Paying too much attention to news and other external data
If you’ve followed me for a while now, you know I am not a fan of news-based trading. In fact, I think it’s downright counter-productive for a trader to pay too much attention to news events and how they may or may not impact a market. You can find whatever you want on the internet, and for a trader that can be very dangerous. If you want to disprove your trade idea, you will find evidence supporting that, if you want to prove it, you’ll find that evidence online too. At the end of the day, successful traders block out external variables and focus only on their trading edge.
- Solution: Ignore the news
I have a good article on Why You Should Ignore the News, and I obviously think you should read it so that you can learn why I don’t pay attention to news variables in regards to my trading, and why I think it can be dangerous.
At the end of the day, if you have a trading method, let’s say it’s price action, you must stick to that method, because that is your trading edge. As the late great Mark Douglas would say, you need a definable trading edge so that you can execute it over a large enough sample size of trades, to see that edge work in your favor. If your trading edge is just basically a random hodge-podge of indicators, news and feelings, you are basically just gambling.
- Mistake: Not letting trades come to you
People tend to ‘force’ trades that aren’t there. They want to make money so bad, that they manifest ‘opportunities’ in the market where none exist. This is basically the same as over-trading, but the point here is that the best trades will tend to stand out like ‘sore thumbs’ on the charts. You should not have to look to hard, if you know what you’re looking for. If you find you must email people and ask other traders “is this a good trade”, it probably is not a good trade, at least not one worth risking money on.
- Solution: Stop looking so hard for trades
As I have written in a recent article, The Best Trades Will Find You, if you stop looking for them. I have found this to be very true over my years trading the markets. The best trades tend to just be super-obvious and almost jump off the chart at you. The question then becomes, do you have the knowledge and skill to recognize these trades and, do you have the confidence to back yourself properly when you do recognize them?
- Mistake: Feeling a sense of urgency to trade
Many traders become addicted to being in the market. They are addicted to the adrenaline and dopamine rush that they get when they enter a trade. Thus, when they are not in a trade, they tend to ‘crash’ and feel terrible, the only thing that gets them feeling ‘normal’ again, is another ‘injection’ of trading into their veins. Perhaps you are not quite THAT ^ addicted to trading, but you still feel some urgency to be in the market. You feel like if you aren’t in the market then you won’t make money, or you feel the more trades you make the more chances you have to make money. Well, I am here to tell you that all of these feelings, thoughts and actions are wrong and will only lead to you failing in the long-run.
- Solution: Realize that the market is a never-ending opportunity stream
The market is always going to be there, the big move today will be over and another big move is just around the corner in another market or the same market. The ‘casino; of Wall Street never ends and it has been this way since capitalism was born. YOU need to survive another day, that means trading less frequently and capital preservation.
- Mistake: Not having knowledge / education before trading live
As I mentioned earlier, I get many emails from traders telling me they are planning to “make some money trading so they can buy my course”. I have to chuckle to myself when I read these kinds of emails. Whether you learn from me or some other source, you must, must, must get educated before you try to trade the markets with real money. There is just too much knowledge you will miss out on by not learning from a trader more experience than you, too much trial and error to figure it all out yourself, and way too much to be lost.
No one wants to lose money in the market, the best way to avoid losing money unnecessarily, is by obtaining a solid trading education before you start trading live.
- Solution: Invest in yourself; invest in a trading education
In my humble opinion, you need to learn price action trading. You need to learn how to read a price chart, from left to right. This is not just an important skill for trading, but for any financial endeavor where you may have to read a price chart and make sense of it. Such as, your retirement account, work-related investing or really anything; all markets have price charts associated with them and if you don’t know how to read them, you are doing yourself a disservice. But, more importantly, for our purposes, if you are planning to be a trader you absolutely need to know how to read and trade price action and you absolutely need to obtain that ability before you try risking your hard-earned money in the markets.
To learn how to read and trade based on price action, start here.
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