Trading is both an art and science; and seldom will you hear someone saying that trading is an easy skill to master.
If you are new to the world of trading, you can be assured of an intellectually-stimulating adventure. In fact, I see trading as a training of the mind and emotions rather than skills and execution.
Being new to the world of trading can be daunting, but being aware of these 5 common mistakes that new traders make can help you sharpen your trading edge.
1) Not Having A Risk Management Strategy
Trading without risk-management strategies is as bad as trading without a plan. There are several ways you can manage risk. Firstly, you need to know your personal risk tolerance.
You must have a good idea of your risk tolerence so that you can determine the maximum amount of money that you can afford to lose on a trade. This will help you set up a strategy on when to stop trading and avoid trading on emotions.
One easy way to do this is to consider what is known as the 1% rule. This means that you should never risk more than 1% of the amount in your trading account on any one single trade.
So for instance, if you are trading a $10,000 account, you should consider risking no more than $100 on any one trade.
2) Not Setting A Stop-Loss
Setting a stop-loss is an important step in managing your trading risk. A stop-loss order enables you to limit your potential loss by setting a point at which your position will be closed.
One easy way to determine where to place a stop price is to find a line of support or resistance on the charts.
3) Staring At The Screen All The Time
Trading can be both a stressful and exciting affair, especially for someone new. You might find yourself watching the screen all the time due to fear that there could be big movements in the market when you are away.
If you’ve set your stop- loss, you should never be put in a position where you need to keep watch at the screen.
Another point is that you should only trade with money that you can afford to lose so that you do not lose sleep worrying about risking this money.
Trading with money you can’t afford to lose will only lead to severe emotional pressure and does not help to put you in the right trading mindset.
4) Deviating From Your Trading Plan
A trading plan is a set of guidelines, to define your trading activity. There is no “right” way to constructing a trading plan, but one of the worst mistakes traders make is to not follow the trading plan they’ve painstakingly developed.
Having a trading plan helps you set up the structure to manage your risk, establish entry and exit strategies, stay focused on your trading decision and help you maintain your discipline. Deviating from it means you are going to most likely trade based on your emotions and gut instead of maintaining a rational and objective mind.
5) Not Recording Your Trades
Trading requires discipline and patience, and the best way to know how you are doing is to make a detailed record of your trades. This is a critical component to forging the proper trading mindset because it gives you a tangible record that you can look at and instantly get feedback on your trading results.
When you keep track for long enough, you will be able to identify certain patterns which you can then fine-tune to improve your trading strategy.
Remember, trading is a marathon, not a sprint!
What mistake have you made? Share them with anyone you care about so that they won’t repeat it!