It isn’t always easy being a noob. Whether it’s in taking on a new job, starting your own business, or trying out a different sport, the degree of uncertainty in a new and unfamiliar undertaking can sometimes be overwhelming and push you to commit mistakes. Trading is no different. Here are five of the most common mistakes that newbie traders make:
1. Trading Without a Plan or Journaling
Even noobs fresh out of the School and in their first week of trading know that the market is as unpredictable as the next American Idol sensation. More often than not, in the attempt to make the most out of the opportunities the market presents, you get so lost in the emotions that you forget what you’re supposed to do.
Think of Frodo in the Lord of the Rings. He was tasked to destroy the ring but in his journey towards Mt. Doom in Mordor, he lost focus on his mission.
With your own money on the line, you wouldn’t want to be like Frodo when you’re trading, would you? I don’t think so. To help you achieve your goal, which is to become a consistently profitable trader, you need a trading plan and trading journal.
It can be a simple outline of your entry and exit conditions and risk management rules, and it needs to be written down any place that you can refer to, record and review your progress. Your trading plan and trading journal will be your best bud, like your very own Samwise Gamgee, and your journal will be like a pseudo-self-coach who will keep you focused on your mission when market forces drive you crazy.
2. Not Setting a Stop Loss
Trading without a stop loss is equivalent to cleaning the top floor windows of the Empire State building without a harness. Sure, there will be some days that you’ll be able to do your job and clean windows, but once you fall off… Well, let’s just say it’s you won’t be cleaning windows any time in the future!Face it, you’re not always right. Shoot, as a noob you won’t be right even be 10% of the time….and that’s perfectly normal. So, you need stop loss points, even just mental ones, to make sure that you are able to survive and fight another day when you do lose a trade. Instead of account-wiping trades, all you have are these small, manageable, and recoverable losses.
3. Revenge Trading
Revenge trading is when you get emotional over a lost trade and try to aggressively recuperate the loss. Oftentimes, revenge trades have twice or even thrice the position size of the previous losing trade. Revenge traders do this hoping that the account is taken back to positive territory as quickly as possible. In gambling, they call this “doubling up.”
While it may be difficult, it’s always best to accept the loss outright and not let your judgment be clouded by your ego. Instead of revenge trading, focus your efforts and energy on analyzing what went wrong and figure out what you can do to improve your subsequent trades.
4. Letting Losers Run
Another common mistake that newbie traders make is allowing their losing trades to simply run all the way to their stops instead of cutting losses early. You might be thinking “Oh well, I’ve set a limit on my losses anyway. I think I can handle it,” while crossing your fingers that the price reverses and moves in your favor sooner or later.
The problem with this mentality is that, even though you’ve already determined at which level your trade will get invalidated, you might be missing out on signals that tell you to exit your trade early. This could come in the form of a freshly released economic report that can cause the price to move against you or maybe a candlestick pattern that suggests the price could reverse.
Think of it this way: If you let your losers run and close your winning trades early, you’d end up with losers that are bigger than winners. That won’t exactly tilt the odds in your favor, would it?
5. Having Unrealistic Expectations
Having goals in trading can help you stay motivated and disciplined. Without them, how are you supposed to keep your game face on?
But, as I mentioned in my article about setting goals that work, it is important to make sure that these expectations are realistic. Making a truckload of pips every single day sounds awesome, but is it possible?Maybe with a great deal of experience and skill thrown in with some luck, but let’s be realistic–that doesn’t exactly describe the typical noob. With that expectation, you might just be setting yourself up for daily doses of disappointment when you repeatedly fail to achieve such a stratospheric goal.
What’s important is that you set realistic expectations and goals, and at the same time take concrete steps to enable you to achieve these goals.
If you’ve committed some of these mistakes, don’t feel bad. I’m 100% sure you’re not the only one and we’d love to hear your story. Share your experience with the world by leaving a comment below or hitting us up on Facebook or Twitter. Maybe the FX-Men or some other knowledgeable traders out there can help!
World-renowned leadership expert John C. Maxwell once said, “A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.” By acknowledging your faults or mistakes, you’re already a step closer to becoming a better trader. Now it’s time to learn from them and turn those bad trading habits into good ones…Good luck!