December 22nd, 2016 → 2:57 pm @ reacoms
Welcome to your first year of trading. If you ever had any doubt at all about your level of ignorance then rest assured that during your first year of trading you are "King Ignorant!". We will group the common mistakes by trader in three main category mentioned as below. I am not claiming to be an expert on trading, but I'm definitely in good situation to talk about these common mistakes by trader, because I've been responsible of making all of the mistakes at some point of my trading career.
2. MONEY MANAGEMENT
a. Listening to others and following trading tips
b. Responding to the nightly news
c. Asking others for their opinions for trade suggestions
d. Averaging entry levels
e. Failing to use stop loss
f. Failing to have a trade plan
a. Don’t know, what is money management?
a. Trading for thrill
b. Trading for vengeance
At the starting point of trading every trader they will habitually listen to others recommendations about the trade and follow tips. This is a main cause for disappointment. Occasionally the tips may be successful in your trading, but over the longer term it won’t.
Frequently, traders without any experience in trading will hear some news, such as that most companies are reporting good earnings or the quarterly GDP growth numbers were ahead of forecast, and the next day they'll go long only to be stopped out at a loss. It takes a long time to understand that once the news arrives in our living rooms in the evening, the information is already old. The market has already predicted and responded to the news and new traders don't realize this.
New comers in trading frequently seek out the opinions of other traders. If they have no idea where the market is moving, they'll usually ask their brokers, friends and family for their opinion. Unfortunately, unless they're full-time traders, the views of others on the market may not be much better than those of new traders.
New traders are usually the world's worst losers. They hate losing trades and will try to keep away from it at any costs. The usual response is to 'average' out their entry levels. For example, say you buy a stock or commodity future at Rs.520, and straight away it falls to Rs. 500. New traders often convince themselves there were good reasons the share went down to Rs. 500. They also convince themselves there are even better reasons it should rebound. They then purchase additional stocks or commodity futures at Rs. 500, averaging down their entry level to Rs. 510, and hoping to benefit from the expected rebound. But in this situation, it's doubtful the stock or commodity will rebound, and all those traders have done is compounded their losses. While being long at Rs. 510 may sound better than being long at Rs. 520, it doesn't when you've laid out double as much money. Averaging entry levels goes against being the '"best loser" it makes the new trader the "worst loser."
Unless they've had the benefit of some trading experience, new traders rarely trade with stop loss or preplanned exit points. It doesn't occur to them that they could lose until it's too late and too costly.
All of the above discussed mistakes can be summarized under this most common mistake called failing to have a trade plan. Listening to tips, reacting to the nightly news, asking others for their opinions for trade suggestions, averaging entry levels and failing to use stops are clear signs that traders are trading without a trade plan. Remember, trading without a trade plan will catch up with you sooner or later.
Generally, the only anxiety for new traders is that they have enough money to start a trade. The idea of money management is given little thought. New traders will not have no idea of their risk of damage brought about by risking too large a slice of their account balance on any one trade.
Remembering where I place the significance of money management, you can understand how making this common mistake can be, and usually is, fatal for new traders and will lead to total loss of your investment.
One of the reasons many people trade is that it provides an exciting thrill from what may be a relatively orderly and traditional life events.
Trading gets the heart is racing and adrenalin flowing. Even if they're losing, traders often keep at it because the trader will expect the next trade is always an exciting mystery: will they win or will they lose?
When new traders lose, they often get angry and want to get "even" with the market. Losing is like receiving two blows: one to your self esteem and one to your investment. And when new traders get pushed they want to push right back! Vengeance rather than logic inspires their trading. Becoming emotional in trading is a common behavior for new traders; however, it's also the easy way to lose all the hard earned money the trader invested for trading.