Here are the top 3 trading mistakes and how to avoid them
It is very likely that traders today will take a position on multiple financial trading markers but these particular traders are prone to making these common mistakes…
So what are these mistakes and how can you make sure to avoid them?
Miscalculating the general rule of balance between risk and reward
Some studies have shown that the most common mistake that losing traders seem to make is not getting the balance right between risk and reward. Many will keep a losing trade going in the hope that the market will change and the loss will turn into a win. The reverse approach is applied to profits as well. A lot of traders get too excited to reap in a quick profit with worry that it may disappear.
This is completely the opposite to the well-worn trading advice of ‘let your profits run and take losses quickly.’ The maths is pretty straight forward, if you for example are losing £100 on trades that go wrong, and only making £50 on trades that go well, your trading account is probably only going to head in one direction which of course will be: down.
Before you place any trade you should always weigh up the potential profit versus the risk that you can afford to take, (risk:reward ratio). As a general rule you should factor in double of the potential profiting amount (if not even more) you expect to make versus the amount you stand to potentially lose if the price moves in any unexpected direction.
If the trade does not fit those requirements, then the sensible approach is to pass on that particular trade and be patient for a better opportunity to come up where the potential is more on your side. This takes discipline and understanding of the trading environment of course which sadly, another trait that most traders just don’t have.
Impatience is a virtue
Patience is another useful and integral trait in trading, but one that many of us will not have in the beginning of our trading lifetime. With any time access to international markets and breaking news and changing prices, there can be a feeling that you need to act at the speed of light. But how many times have you opened a trade and refreshed the page multiple times to then be disappointed that the market has not immediately taken off in the direction you were expecting?
The reality is that just because you have decided through the information that you have acquired the market needs to move in a certain direction, it rarely means it will start going that way as soon as you place your trade. The market has not been waiting patiently for you to decide to buy or sell before going on its merry way!
Trades need time to develop, you can’t throw a load of ingredients into a bowl and expect a cake to appear, and so if you have seen what you think is a good opportunity in the market then place your trade and give the market a chance to prove if you will be you right. This is why Stop losses are very important in trading, to help protect against trades that don’t go in your direction, but don’t place them too close to where you entered the market that you will be taken out of the trade on just a normal fluctuation in price.
Risking too much capital in a single trade idea
This is the third most common mistake is in relation to the capital amount at risk. The sad truth is that most people risk too much on one particular trading idea.
For example, if you have a balance of £1000 in an account, then taking a risk of £200 on whether the euro is going to fluctuate is a foolish approach by most professional traders’ standards. If losing on one trade means a serious percentage of your account balance will disappear, chances are that the account will not last very long at all.
Most professional traders would advise on only risking around 1-3% of the capital value of your account on any one trading idea. In other words, start conservatively, even though this might be going somewhat against the nature of many aspiring traders, patients is a virtue and does pay off in the long run.