If you have been trading for a while you will realize that the reasons that you lose money can boil down to the same repetitive mistakes that you made.
Some trading sins are more evident in you than other traders. While some may suffer with entry points you might be facing issues of overtrading.
In this article we will look at 7 of the most common trading sins or mistakes that traders commit again and again.
1. Not Having A Solid Trading Strategy
This is perhaps the most obvious.
Not having a solid trading strategy is the biggest sin that a trader can make.
There is a saying that goes like this "If you fail to plan, you plan to fail".
It is very important for a trader to have a trading strategy.
It is very important that you have a system that works.
If you enter and exit stocks based on emotions, gurus and newsletter you will not be consistent.
To be able to be successful in the long run, you need consistency in your trading. Without a proper trading strategy you will not have data to work on.
That is why you need to specialize in one trading strategy and be good at it. As you trade the trading strategy you begin to know the ins and outs of the trading strategy.
You will know when is the best time to use that trading strategy and when not to use the trading strategy.
It is better to know a lot about one trading strategy than to know a lot about the stock market.
What should you do if you do not have a trading strategy?
The first step is to find a reliable trading strategy.
You can pay to learn from an experienced trader. You can devise a trading strategy yourself based on your own observation.
Or...
You can head to my website's homepage and scroll down to look at the many trading strategies there.
Try some of them, paper trade them.
The important thing when you learn about a trading strategy is not to take it and immediately put it to work with real money.
You need to paper trade it.
You need to familiarize yourself with the trading strategy.
Once you are successful making money 7 times using the trading strategy then only move on to using real money.
When you use real money...
Start small.
Try risking $100...
Then if you are successful in 3 trades, raise it to $200
If you are successful in another 3 trades, raise it to $400
If you are successful in another 3 trades, raise it to $800
The important thing is to increase your exposure to the market little by little as you get comfortable with the trading strategy.
2. Trying Too Many Trading Strategies
There is a saying that goes like this "Jack of all trades, master of none".
This proverb shows us a person who dabbles in many areas of business but does not gain a special valuable skill.
In the end, he or she cannot rise and be outstanding.
Picture this...
A person starts a shoe business and next month starts another business selling hot dog and the next month starts a business selling Iphones and so on and so forth. Each month he starts another new business.
What do you think is the likelihood of success for that person?
Not only does he not gain any knowledge and expertise on the area of business, in fact he will lose money in most of them.
When you are just starting out...
Be a master of 1 trading strategy.
If you are successful with that trading strategy for 6 months, then learn another trading strategy.
Usually, it takes only 2-3 trading strategies to be able to make a living trading.
Some traders only use 1 trading strategy to earn a living in the markets.
That is something for you to think about.
3. Risking Too Much On One Trade (Biggest Trading Sin)
This is the trading sin that can ruin the career of a trader.
If you are not careful you can blow up an entire account that was build up over many years.
The culprits of risking too much on one trades are brothers and they are:
Greed
Too confident in oneself
When you have a string of wins you usually start to be more confident in your ability. You think you have found the holy grail in trading.
You also think that you are invincible.
That is when the images of yachts and luxury mansions start to build up in your mind.
That is also when greed takes over and you risk 50%, 70% or 100% of your capital in a single trade.
To compound things, you even borrow money or use margin to enter the trade hoping for that big win.
Then when the stock gaps down...
Your entire account is wipe out and you owe money to the broker.
Margin calls start to come in.
If only you have not risk so much on one trade.
What is a good percentage to risk on each trade?
Good question but it is subjective.
2% would be a good percentage.
5% can be good as well.
Try to keep it below 10% for each trade no matter how confident you are on the trade.
There is always another opportunity round the corner.
4. Having A Small Reward To Risk Ratio
In trading you need an edge.
If you have no edge in the markets, you will not come out on top in the long run.
The casinos are in business for a long time because they have an edge. Sure they do take losses here and there but in the long run, that small edge makes them rich. Not the gamblers who go to the casino.
Having an edge in the market can come in two forms:
A high winning percentage (65% and above win rate)
A high reward to risk ratio (2 and above)
Most people will understand a high winning percentage. We are wired to want a high win rate. It is also an easy concept to understand.
Try to have a trading strategy that gives you at least 65% win rate. That comes to about 2 wins for each loss.
This is important as you want your brain and emotions to get used to winning 2 out of 3 trades.
It really helps.
If you lose more often than you win, it affects your emotions.
Win begets more wins.
Let's deal with a high reward to risk ratio which is the more important one than the winning rate.
You can have a win rate of 90% but if you lose $1000 for each time you lose and win $100 for each time you win, then you are still red in the long run.
Try to find a trading strategy that gives you $1000 for every $500 you stand to lose.
That way your reward to risk ratio is 2:1.
Even if your win rate is 50%, because your reward to risk is good, you will still make money in the long run.
The best is to have:
A high win rate
A high reward to risk ratio
That is the twin pillar of success in trading.
If you want to learn a trading strategy that gives you a 2:1 reward to risk ratio then check out The Daily 20/50 Moving Average Bullish Cross Trading Strategy.
5. No Trade Management : Bad Entry, No Stop Loss, No Take Profit Target
If you have a solid trading strategy, then you will have a good trade management system.
The problem with most traders is either:
Their trading strategy is flawed (missing one pillar)
They do not follow their trading strategy
A good system that consistently brings in the money have these pillars:
A precise entry
A stop loss
A way to take profits
A way to address an emergency
A way to deal with a black swan event
The first 3 is pretty straightforward but it take a great amount of discipline to deal with the first 3.
With regards to the last two, it usually happens when the stock or instrument moves too fast too much in the direction we don't want.
Is your trading strategy or system able to deal with it?
Be honest with yourself and ask questions.
If you don't have peace at night when you sleep then you need to revise your trade management.
6. Making Decisions Based On Emotions
This is another great sin that is committed by tons of traders.
I'm sure you have made at least one decision based on emotion.
Remember the time when you took a heavy position because you read about it in a stock advice column?
Emotions in trading generally fall into two big categories:
Fear
Greed
FOMO or fear of missing out is based on the emotion of fear isn't it?
You are afraid that the stock will shoot up 100% higher leaving you in the dust.
This is where you begin to chase the stock only to see it fall tomorrow.
Some people take on too big a position because of greed.
When you take a trade, ask yourself honestly.
Is fear and greed the motivating factor behind this trade?
If there is the absence of a solid fast "no", then you should reconsider the trade. Full stop.
There is absolutely no benefit in trading when you are choke full of emotions.
If there is a lot of fear in you of losing then you will be clouded in your judgment.
Here are some steps to avoid fear in trading:
Never ever trade with money you can't lose
Always have at least 1 year worth of savings so you don't need to depend on money from your trading account to sustain your daily life
There is also another emotion that affect many traders.
It is the emotion of anger.
Never ever trade when you are angry. It will affect your bottom line.
For example, when you have an argument with your spouse, you will be filled with the emotion of anger.
It is always important to have a supportive and understanding spouse.
If they guilt trip you or ask you to do many things while you need to trade then you should talk it out with your spouse.
Establish a zone and time where you should not be disturbed.
If your marriage and relationships are affecting your trading performance you should really seek professional counseling.
Talk it out with your partner.
If it does not work at all, then you should STOP trading.
It is better for you to invest in an index fund like the SPY and make an average of 10% yearly in the long run rather than risking your portfolio and your marriage.
Believe me, money is not everything.
7. Having Too Many Positions At One Time
"Too many cooks spoil the broth."
How many positions you should have at any given time depends on two things:
Are you a longer term trader
Or are you a short term trader
There is only so much that the human mind can take.
If your trades lasts for months and weeks then you can afford to have many more positions at one time.
Do remember the longer your trades, the more it will be influenced by the general market. If the S&P 500 suffers a crash, your position can take a heavy hitting.
It is not uncommon to see portfolios go up and down 20% in a single week.
On the other hand, if your trades last for a few days, you should not put on too many trades.
After all you will close out the trade in a few days. You can always initiate another trade very soon.
If you are day trading...
Then 1-2 positions at any given time is enough.
I don't know your trading style or how your trading strategy works.
When in doubt remember...
The LAW Of Diminishing Returns.
Summary
I hope this article has opened your eyes to the trading sins that plague so many people.
I can't guarantee you success but if you avoid all these trading mistakes, your odds of being a successful trader will increase dramatically.