Are you struggling to become a profitable trader? Do costly mistakes stop you from making more money?
If so, you're not alone.
Learning to trade Stocks and Options can be one of the most challenging things you can do. It can also be one of the most rewarding. And when you eliminate these common trading mistakes your results will improve. If you’re new or have been trading for a while, you will likely experience some (if not all) of the common trading mistakes listed below.
So I want to encourage you to not be afraid of making mistakes. Many of my greatest trading failures became my biggest learning opportunities.
I encourage you to print this list off and place it somewhere visible where you trade.
1. Having Unrealistic Expectations
For some reason, many people associate “Trading the Stock Market” with “Get Rich Quick”. And many of my competitors will try and sell you trading courses claiming that you can. This causes many new traders to have unrealistic expectations as to the returns they believe they can potentially make in their first 6 months.
I’ll be frank, if you’re reading this and expecting to make $100k per year starting with $1k in your trading account, you’ll likely end up disappointed. For anyone new, learning about the Stock Market and how to trade profitably is HARD WORK. For new traders, it will likely take you at least 6 months before you become confident in analysing charts and finding profitable trades. But the rewards will be worth it. When you gain experience and your confidence grows, it can be just as you imagined. A consistent income each month. But that takes hard work and persistence to create. And hard work to maintain.
Begin your trading journey with a clear understanding of what’s possible. Be realistic in your expectations and don’t be afraid of hard work. Remember, trading is a skill that you can use for the rest of your life.
2. Not Reviewing Trades
All profitable traders take time to regularly review their trades, both winners and losers. Allocating an hour or two each week to review your trades will be the biggest contributor to your long-term success. Why? Reviewing trades will highlight execution errors (e.g. where the strategy was not followed, or silly mistakes) or gaps in your analysis. Both of which over will result in a drawdown of your account. Small mistakes repeated consistently, are the difference between your success and failure.
So why don't more traders review their trades?
Traders who don’t review their results do so because they either don’t want to admit to their mistakes or acknowledge losses. Better to review and improve your results than continue to see losses in your account.
Losses will teach you a lot. They will make you a better trader for the learnings they give you and the future profits they bring.
3. Revenge Trading
The desire to be right and being unable to accept losses can often lead to emotionally based “Revenge Trading”. The pain of a loss is a signal to our emotional “inner chimp” to come out to play. This results in feelings of frustration and anger. Consequently, many end up placing poor trades (that don’t meet any specific criteria) to make up the loss.
Remember, losses are a part of trading. Accept them, learn from them, and move on. Continuing to place trades in the hopes of recovering your losses will only cause more frustration and further losses.
4. Failing to Manage Risk Correctly
Many new traders begin risking too much of their accounts on a single trade. Their first thought is usually how much I can make on the trade. How much they could lose is an afterthought. Protecting your capital should always be your first priority. Market conditions will not always be favourable to your strategies, which can result in a series of losing trades. Always position size your trades so that the most you can lose is 1% of your account. Not only does it preserve capital, but after a series of losses, the risk on each trade will become smaller.
5. Not protecting Your Stocks
Warren Buffet famously said, “Rule Number 1: Never Lose Money. Rule 2: Never forget Rule Number 1”.
When you don't protect your stocks you expose yourself to large market corrections. These happen more frequently than traders think. Trading this way will be emotionally draining. It also increases your likelihood of revenge trading. You will also need higher returns to recover from the account drawdown.
Learning how to use Put Options will allow you to protect your stocks against market price falls. This will be better for your emotions in the long run.
6. Failing to Plan your Trades
Before you place any trade, you should have a trade management plan in place. This will allow you to avoid costly emotional-based decisions when things go wrong.
As a minimum, document the reasons why you are entering the trade, where you will take profits, and where you will exit if the trade moves against you.
7. Falling in Love with Your Stocks
The single biggest reason people lose money in the Stock Market is that they “fall in love” with their stocks. They continue to hold on to them even when they start losing money. For many, it’s because they are afraid to accept a loss. So your losing trade often turns into a “Buy and Hold” investment.
When investing in stocks, we do so only to make money. So, when your stocks start to lose money, don’t be afraid to sell them. Move on and look for a better place to invest your money.
If you have experienced any of the trading mistakes above, great! The first step to improvement is awareness. Now you can move forward, eliminate unnecessary mistakes from your routine, and improve your investment returns.
Struggling for consistency? Read our latest post to learn more.
If you’re currently trading or investing and are interested in speeding up your learning curve, here’s what you need to do next.
Here's What to Do Next
I’ve created some free stockmarket training for you and I’d like you to have it.
This will allow you to learn more about investing in the Stockmarket and our online Learn to Trade Programme. This is designed for people who want to take charge of their finances, invest for the long-term, earn more, and become financially secure.
Here’s what you will learn in this training:
How to reduce risk and invest in Stocks in a safe and steady way
How using options will allow you to create an additional monthly income and boost your returns in only a few hours per month
How you can protect yourself from the Next Stock Market Crash, so you can worry less and focus on the things you enjoy