In this post, we'll explore ten common trading mistakes to avoid. Making mistakes is part of human nature. I have never met a professional trader who has never made a mistake. But what differentiates the pros from amateurs is that professionals are hyper aware of their mistakes and have the discipline and self awareness to prevent them from happening again.
1. Lack of a trading plan
Ever heard the saying that the failure to plan is planning to fail? This is especially true in the business of trading. Many new traders rush into this business without a clearly defined plan. In the absence of a written trading framework and defined rules, emotions of fear and greed take over. This approach never leads to success long term. Take the time to define your plan and commit it to memory. Print it out and have it at your trading desk. And make sure you written plan covers the following areas:
Why are you in the business of trading? What is your long term vision? What do you want to achieve?
Define your processes. What is your dedicated time to do your analysis and be in front of charts.
Quantify the setups you’re looking for. Personally I have a separate folder in addition to my plan, where I store screenshots of ideal setups for further study and reference.
What are your entry rules following the correct identification of your setup? Do you apply stop or limit orders or enter at the market?
Risk management rules. How much do you risk per trade? What is your maximum daily/weekly loss? Do you plan to scale in or out of trades?
What are your exit rules? Where do you place your initial stop loss? Do you trail your stop order? How do you define you profit targets? Do you exit prior to major news announcement? Do you apply a time stop? For example exiting before the weekend?
2. Not journaling and reviewing your trades
A simple fact makes trading complicated. It’s that a good setup that ticks all the boxes can still result in a loss. And likewise a bad setup can result in a win. Your primary job is to follow your trading rules. Additionally, in the absence of a post-trade analysis, you have no process for optimizing your strategy.
Make sure you document all your trades. Did you follow your rules or did you deviate from your plan? Was this a good setup irrespective of the outcome? As you get advanced, document your emotional states as well. This will benefit you over the long term. Maybe you should not even think of trading after a sleepless night. If you get anxious and constantly monitor your trade in real time, maybe your position size is too large and you should reduce your risk.
Study your entries, exits, timing and emotions. Learn from your successes and failures. It’s one of the best ways to improve as a trader. And the lack of this process is one of the most common trading mistakes to avoid.
3. Emotional trading
Did you ever jump into a trade that didn’t quite meet your rules just because you had a fear of missing out? Ever re-entered a trade after being stopped out just because you had a feeling that it would turn around? Remember that time when you looked for every possible reason to stay in a losing trade? Or when you focused too much on trading instruments that caused you losses recently, just because you want to make your money back?
Your job is to stick to your trading plan, simple as that. If you ever observe emotions taking over, stop, take a break from trading, reset and get back with a clear focused mind.
4. Taking too many trades and ignoring correlations
Keep your trading focused and be mindful of correlations. Let’s say a textbook setup forms on AUD/JPY. Most likely a very similar setup will form on NZD/JPY as well as its highly correlated and perhaps other AUD, NZD or JPY crosses will show a similar picture. Don’t get into trades across all of these. Effectively all these setups should be treated as one trade due to the correlation. Choose the best looking setup or split your position into two trades, using half of normal size.
In addition, try to avoid being in too many trades at the same time. With every additional trade, it gets harder and harder to monitor and manage your positions.
5. Following the crowd
Many new traders start by passively following other experts and signal services. They take all trades without understanding the underlying logic. Don’t be lazy and invest the necessary time and effort into learning the fundamentals. You will never be successful long term following other people.
Psychology is such a significant success factor and you need to adopt a trading approach which suits your personality. Develop your own trading plan with rules you understand and are confident in. It’s ok to use trading signals and analysis provided by other traders, as long as these aid your own trading approach.
6. Focusing on absolute returns vs account growth
Many new traders start with a smaller account size with the aim to go full time or make a nice side income from the get go. But let’s be realistic. Let’s say you start out with a $5,000 trading account. A 2% expected monthly return is very good. But even that means “only” a $100 average profit on a monthly basis. Considering the significant amount of time invested, this hardly feels enough. And leads most new traders into the pitfalls of overtrading and trading too large.
Focus on account growth and percentage gains, not absolute returns. Your bankroll will grow over time, especially if you can deposit regularly to add to your trading profits. And if you can show a 12-18 month consistent and profitable track record, you will have no issues getting funded. There are lots of prop trading firms and investors out there looking for skilled traders to manage their capital.
7. Unrealistic expectations
Don’t fall into the trap of believing that you will be profitable straight away. Trading is arguably one of the hardest businesses to learn and master. You’re up against banks and institutions with unlimited resources, some of the sharpest minds out there and HFT trading firms and hedge funds that constantly head hunt for the top trading talent out there.
Trading can be very rewarding and an effective wealth building tool. But it will take some time to master. Ask any professional trader and they will tell you it took them 2-3 years or longer of full time effort to start becoming profitable and consistent. You’re building a very expert skill set and this takes time.
8. Lack of confidence in your trading system
Let’s imagine you encounter a string of losses. Do you have the tendency to immediately start tweaking and optimizing your system? Most likely you haven’t done sufficient backtesting and/or you don’t have enough trading history to maintain confidence during drawdowns. There is not a single trading system which wouldn’t encounter periods of underperformance. And the only way to build confidence is by having enough history to reference.
Don’t underestimate the power of backtesting. It will be so much easier to stick to your plan during a 10% drawdown and a string of losses if you know these kinds of losing periods occur regularly. Long term profits are what matters. Remember this is a marathon and not a sprint.
9. Trading too many systems
Another mistake new traders make is they learn multiple strategies and start trading all of them without truly mastering any of them. Focus on a single strategy until you become an expert in it. It’s fine to gradually add new setups and approaches to your trading arsenal. But start with a single strategy, focus on one setup until you gain mastery. There are many paths to profitability and you need to focus on yours.
Another related mistake here is jumping from one system to another after a few losses. This is related to lack of confidence in your trading system as explained above. If you have proof that your system is profitable long term, there is no reason to switch systems.
10. Lack of consistency and routine
Number ten on this list of trading mistakes to avoid, but no less important than the above. A large part of successful trading is process driven. Every professional trader has a defined trading routine. They know exactly when they are supposed to do their analysis. They know what they’re looking for. Even time for study and professional development is planned for. This goes back to item number one on this list. Define your processes in your trading plan and stick to them. It’s not ok to do your analysis one day and skip your work the next day. You will miss out on trades and your equity curve will suffer.
Summary of trading mistakes to avoid
This is not an exclusive list. There are many other trading mistakes to avoid. But I do feel the 10 explained here are the most important ones and if you learn from them and act accordingly, you will have a much better chance at success. As additional reading, I can recommend reviewing this list of trading rules on Investopedia.