The first step in learning from your trading mistakes so that you can avoid them in the future, is identifying them. Once you’ve identified them, you have to admit to them and accept that you are indeed the one at fault; it’s not the markets being too volatile, it’s not news events and it’s not your broker. You, and you alone, are responsible for your trading mistakes and your trading account, so let’s identify the 9 worst mistakes that traders make so that you can get to work on eliminating them once and for all…
1. Trading too much (over-trading)
Trading too frequently is number one on this list for good reason; it’s basically the most prevalent and most destructive mistake traders make, over and over again. I’ve written quite a few articles that discuss the psychology of over-trading, so I won’t get into this too much here. But, you should be aware that it’s extremely easy to trade when you probably shouldn’t, and it’s so easy to do that many traders aren’t even aware they are doing it.
The easiest way to avoid over-trading is to master your trading strategy one setup at a time and then ONLY trade if one of those setups is present. If you trade at any other time, you are trading too much and you will unnecessarily lose money as a result. Thus, not over-trading is something you can only achieve through self-discipline.
2. Risking too much
Risking too much money on a trade means you are risking a dollar amount that you’re uncomfortable with potentially losing on that trade. The problem with this is that when you do lose more than you’re comfortable with, it hurts emotionally. This emotional pain or frustration is usually a catalyst for revenge trading, which is when you are so angered or disappointed by a loss that you feel compelled to jump back into the market to try and make back that lost money. Sadly, this is not the proper way to trade and will usually only lead to more losses and a deeper sense of regret, anger and frustration, which only works to perpetuate the cycle of emotional trading.
3. Thinking too much
If there is one profession that lends itself to self-sabotage by thinking too much, it’s trading. At the end of the day, trading is really pretty simple, but our minds make it complicated. It should be as simple as: Is my trade signal present? If yes, then move forward and decide on entry type, stop loss distance, lot size, etc. If no, then don’t enter the trade, go do something else and close the laptop up.
Sitting there, stewing over your charts, trying in desperation to find a trade signal, is going to cause you to over-trade. Or, trying to read multiple financial market news sources in hopes of finding some ‘tip’, is also futile; it’s going to cause you to over-trade most likely. Similarly, thinking too much about a good trade that you have on can also mess you up. Most of the time, you’re better off not thinking about a trade you have on, and if you’re not in a trade and there’s no obvious setup to enter, don’t think about the market at all, you’ll be far better off this way.
This one is big. A big problem that is. Becoming arrogant or over-confident after a winning trade or a series of winning trades is often what happens right before traders slide into a huge losing streak.
Why, you ask?
It’s simple really. This one is all about psychology and how we let the market affect us. Most of us are not aware we are becoming over-confident or ‘cocky’ about our trading until it’s too late. The feeling will slip over you subtly; it will start out as optimism (this is OK), but that quickly turns into greed (not OK) and a feeling that you are ‘on a roll’ so you might as well keep trading. Well, this is fine IF there’s actually a trade to take that meets your trading plan criteria. However, the problem is that when you have this feeling of greed and over-confidence, you somehow start to find ‘other trades’ where normally you would not. Your sense of risk in the market is dulled by your greed and you lose all the money you won recently (and maybe more) because you let your over-confidence compel you to jump back into the market without a high-probability price action signal being present.
5. Reading too many trading websites (not this one of course)
Information overload is what I call it. It’s when you try absorbing too much information about trading; too many strategies, systems, news reports, etc. All of this information can become an addiction in its own right. You feel like you ‘need’ to learn more and more and absorb more information, because you think it will give you some edge over other traders or that it will ‘show you’ some trading opportunity you didn’t otherwise see.
In reality, all this type of behaviour does is confuse you and cause you to take stupid trades, otherwise known as over-trading, as we discussed above. You need to forget about all the information on the internet and elsewhere. You don’t need it. It’s a waste of your time and energy. All you truly need is to become ‘in-tune’ with the market by learning to read and trade from the price action. This is all the information you need to analyse.
6. Gambling – having no strategy or edge
Especially if you’re arrogant as we discussed above, it’s extremely easy to end up gambling in the market. Another cause is trading without a strategy or trading edge; many traders think they can just ‘wing it’ and don’t really need to actually learn how to trade. However, if you do not have a real trading method, ideally that you’ve learned from a credible teacher / mentor, you do not have the high-probability trading edge that you need to thrive or even survive in the market. There’s an old saying about casinos, that the “House always wins”, it means that the casino will always win in the end. If you treat trading like a casino, the market and the other traders in it will always take your money in the end.
7. Not having a risk and money management plan
Perhaps another one of the most widespread mistakes that I see traders make over and over again, is not having any type of plan or strategy to manage their risk and their reward.