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3 Common Mistakes Made By Beginner Traders

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3 Common Mistakes Made By Beginner Traders

Part of what makes trading one of the most unique jobs in the world is how isolating it can be, particularly if you’re a retail trader. 

There’s nobody, no clients or customers, holding you accountable for your P&L besides you. Nobody hanging over your shoulder making sure you’re doing it correctly. Just you. Nobody to tell you when you’ve made a mistake. Sorry, you’re gonna have to figure that out on your own. 

But it’s that same isolation that attracts so many people to trading in the first place. Because, at the end of the day, the only person stopping you from being the best trader you can be is you. 

Luckily, learning to trade has probably never been easier. Between the endless amount of information online on everything from trading strategy to market data to broker recommendations, to trading software backed by artificial intelligence, there has never been more resources available to the masses. 

That said, trading is a challenge. The best traders in the world are only successful a little over 50 percent of the time. What sustains their success is their ability to minimize losses, stay consistent, and avoid silly mistakes. 

Here now are three common mistakes made by beginner traders, as highlighted by VantagePoint’s ebook “10 Common Mistakes New Traders Make.”

1) Falling in love with positions

This is a mental trap that all traders and investors are vulnerable to, but especially so to new traders who don’t have the benefit of past trades to remember from. 

Similar how your first car probably holds sentimental value—even if it was a piece of junk—it’s common to feel a sense of attachment to the first few positions you take. After all, gathering the courage to actually put your money on the line is a big deal!

If a trade works against you, don’t let that emotion cloud your judgement. It’s normal to feel insecure. It’s ok to wonder if you’re giving up too soon on a trade that’s moving the wrong way. It’s not ok to hold onto that trade simply because you don’t want your first trade to be a loser. If a trade is working against you, take some time and seriously assess whether you still believe in your original idea. 

The best way to avoid falling in love with positions is to, at the very least, have a mental stop in your head when entering a trade. This will give you an idea from the beginning of what it would for you to get out. That way if that time comes, the idea isn’t so shocking. 

2) Not using stop losses

This falls in line with the previous common mistake. Having mental stops is all well and good, but the best way to minimize losses is to actually use a stop-loss order. Stop-losses are triggered when your position reaches a certain price, at which point they become market orders and your broker will automatically execute a trade for you. 

How should you know when to exit a trade? Look for a signal. This can take the form of a moving average crossover, support and resistance, or any other technical sign from the chart. 

There are two general rules of thumb regarding set your stop-losses. The first is to set your stop-loss 10 percent below the price at which you went long. The other is to set so you don’t lose more than 1 percent of your entire account. 

More experienced traders will utilize trailing stops, or stop-losses that follow a stock up, which allow for you to hold onto your gains in the event a stock runs up and then suddenly collapses. 

3) Poor risk management

“Risk management” is a catch-all phrase that can broadly apply to a lot of things. It’s also probably the most important things in becoming a successful trader, and unfortunately one of the hardest. 

Risk management can refer to position size, or making trades that are too big for your account to handle. It can be not planning your trade well ahead of time (i.e. not having a clear thesis or exit strategy). Or it can mean using instruments that you don’t entirely understand, such as options or leveraged ETFs. 

Ultimately, the only way to become a good trader is to just do it. Whether you’re paper trading or starting with a small amount of money, all the prep in the world is no substitute for experience.  

VantagePoint is a content partner of Benzinga. To get a free demo click here.

Posted-In: beginners Risk Management stop loss Trading Education vantagepointEducation Personal Finance General Best of Benzinga

 

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