The trading world can be a tough one to navigate especially for those who have big ideas but little execution. Almost every trader has made mistakes at some point in their lives that have shaped the way they trade now. Mistakes in trading are all part of the learning process. However, learning how to avoid common trading mistakes beforehand can save you a lot of money. That being said, here are some of the most common trading mistakes that traders should avoid.
Not having a trading plan
All successful traders have a clear trading plan and not having one will ultimately lead to failure in the long run. A typical trading plan should consist of your reason to trade, the time you trade, the trading instruments you trade, and where you trade. Sticking to a trading plan will help you to learn, trade, and profit from your trade.
Not understanding risk management
The lack of risk management is why only 5% to 10% of traders make money. Risk management refers to determining how much you are willing to lose on a given trade. While no single trade can make you rich, losing a trade can end a trading career. As a rule, you should never risk more than 1-2% of your entire portfolio on any single trade.
Taking big positions
Every trader is attracted to a big winning trade, and the temptation to take a big position is always there. However, money management is essential for keeping them in the market. Taking too big a position can entail risks as there is no guarantee that the trade will go the way you want. For instance, if you take a risk of 50% of your capital, a single bad trade can seriously decrease your trading capital.
Taking too many positions
Online trading has opened many markets for traders, with numerous trading opportunities arising daily. However, taking too many positions can be a detriment to your trades. Monitoring too many positions at once can be risky and confusing unless you use a robust and automated trading system that automatically places trades. The human brain has limitations that can only deal with a limited amount of information at any given time. Taking too many positions increases the chances of failure.
Using too much leverage
One of the main attractive elements of markets like forex, oil, indices, precious metals, and cryptocurrency CFDs is the ability to use leverage. Leverage allows us to trade a much bigger position even if we have a smaller amount of trading capital. Using a high level of leverage while the trade turns against you can result in the total wipeout of your trading capital. The best way to use leverage is by starting with the lowest level of leverage offered by the trading provider before moving up slowly.
Not having a good exit strategy
Letting profitable trades turn into losses is one of the most common trading mistakes. The best way to correct this mistake is by proper planning. Every trader should know when they are going to exit before they enter into a trade. The best way to do this is by developing a solid trading exit strategy and setting an objective from the trade. A proper exit strategy should have a profit target(s), risk/reward stop, a tight trailing stop and a wide trailing stop.
The first step to overcoming trading mistakes is to be aware of them. Reviewing the above common trading mistakes can help remove the negative and loss-making aspects of your trading.
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