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Many people who are considering trading or are new to it need to understand that they can make a lot of mistakes. We know that mistake costs traders money, so every mistake we can save you from will help you save if not make money. In this article, we’ll discuss 7 mistakes to avoid as a novice trader.
Investing More Money Than What You Otherwise Can Afford to Lose
Let’s face it; trading has a very high risk associated with it. So, every trader will lose money a couple of times each month. The key is knowing how to manage your risk, and one way of doing that is not invest more than you can afford to lose.
Sure being positive is good, but don’t be unrealistic. Make sure to track your losses as that will make you less prone to risky behavior. However, believing in luck and anticipating that you’ll win is highly risky.
The ’All-In’ Approach
The best and fastest way to watch your capital disappear is to put it all in one stock, asset, or currency pair. You shouldn’t be banking on lady luck to make a profit as a trader. Each time you go all in, there is a considerable risk associated with it i.e., you can lose it all. It goes without saying nobody can win all their deals. So, if you continue to use this approach, you will lose all your capital.
The Wrong Trading Time Frame
According to trading fundamentals, using a 5-minute graph is detrimental. Many basic factors can take several years to unfold. You need to consider GDP growth, inflation, and the political situation all of which can’t be factored into each 5-minute interval. So, your timing is critical. If you are a minute too fast or too slow, an opportunity will be missed and you may lose money.
Not Having a Trading Strategy
Using your emotions and gut is a bad idea. Only a handful of traders have been successful using only their gut and emotions. As a trader, you are tempted to believe in luck when trading and so there is a chance you will rationalize your decision and then confuse it for a gut feeling. All you are experiencing is the desire to win on that trade. Again as mentioned above, you are trading and not gambling, so your approach needs to be different.
Not Putting a Stop-Loss in Place
We’ve seen that many traders don’t use the stop-loss feature on their trading platform. Not doing so could mean that you end up losing more money than you should because the trade didn’t auto close where it should have to prevent the hemorrhaging of your investment. The stop-loss feature will automatically close a position if a trade dips below a certain threshold.
Changing The Strategy Too Frequently
Sure, you should switch to another trading strategy when it stops working for you. However, what is your definition of a sub-par strategy? Some may define it as a strategy that fails for 5 consecutive times, but for others, it may be fewer times or other factors. That said, going through a losing streak is a fundamental part of trading and it will happen to everyone. So, even the best strategy will have its days.
Many novice traders may not know this, which makes it very dangerous. Sure, you might know about diversification to mitigate risks, i.e. buying and selling a myriad of assets instead of investing in just one. Though what you might be overlooking is that even though some assets appear to be different, they are correlated. For instance, the USD/JPY and EUR/USD currency fair behave in a very similar fashion because of the common dominator i.e. USD. So, your goal of diversification should be to choose independent assets.
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