Trading Mistakes and Remedies
There are several common mistakes made repeatedly by new traders. Each one acts in opposition to the achievement of success and profitability. However, given the proper time and attention, each fault can be remedied.
Listed below are a few common mistakes made by new (and some veteran) traders:
- Lack of a comprehensive trading plan: The marketplace is a dynamic arena with nearly limitless possibilities facing an active trader. Without a clearly defined trading plan to use as a point of reference, a trader will operate within the market from a reactionary posture and struggle to stay on the market’s “lead lap.”
- No defined money management strategy: Money management may be the most important facet of trading. If fundamental principles of money management aren’t employed, undue risk may jeopardize the solvency of the trading account.
- Acting on “tips” or “advice”: Making trading decisions on a “hot tip” or “inside information” is often a product of emotional trading. Odds are that the hot tip is a rumor, hearsay or worse. Even if true, there is a strong possibility that the tip has been widely circulated and is already priced into the market.
- Satisfying the desire to be “right” instead of making money: The main goal of actively trading financial securities is to make a profit. At the end of the day, the market is always right, and traders are often wrong. The realization that one can be wrong about many things and still make money is a difficult idea to accept, but one that is a key part of a healthy trading mindset.
Each of the aforementioned mistakes acts as a potential barrier to a trader’s success and profitability. However, through dedicating adequate time and effort, the frequency of these mistakes can be reduced or eliminated.
Engaging in the following activities and applying them to trading operations can create a mental environment that’s useful in the remedy of trading-related challenges:
- Goal setting: Goals can be an empowering method of measuring trader growth and play an important role in building confidence. Setting realistic periodic goals based on performance and outcome is essential to accurately measuring the relative success of a trading operation.
- Developing trading rules: A set of clear-cut, probability-based trading rules is an important part of defining the dialogue between trader and market. For instance, rules governing trade entry and exit, time of day in which to trade and length of trading session give the marketplace defined limits. During volatile periods, a detailed set of trading rules can serve as a point of reference and provide much-needed context to the chaos.
- Implementing a money-management strategy: As stated earlier, money management is a key aspect of profitability. A comprehensive money-management strategy relates risk to reward and clearly defines the exact cost of a losing trade and the gain of a winning trade. Proper money management reduces the anxiety surrounding the currency transfer involved in a given trade and puts the financial impact in perspective.
Goal setting is instrumental to fostering a positive, confident mental attitude in addition to providing a measuring stick for trader development. A rule-driven trading plan eliminates euphoria, as the rules govern all interactions with the marketplace, including both profitable and losing trades. Through the implementation of a comprehensive money-management strategy, anxieties related to capital loss are greatly reduced.
Attention given to these three areas can successfully mitigate many of the problems associated with emotional trading and minimize the negative impacts of fear and greed.
Summarizing, in order to successfully avoid the many pitfalls presented by active trading, ample time and effort must be given to the honest assessment of one’s emotional and psychological state of being. Achieving a state of mind that fosters successful trading is a full-time endeavor and a discipline all of its own. The development of a comprehensive trading plan and the ability to execute that plan without any hesitation or bias is a key aspect of trying to achieve long-term profitability.