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Here are some of the most common mistakes that traders make. These errors can stop them from reaching their full potential as traders.
Not using a Trading Diary
The most successful traders out there all treat their trading like a business. Like any business, trading needs to be recording and documented as part of the procedure or process.
Not only is it good trading practice to record all your trades but also is an incredibly valuable tool to assess your skills as a trader. Going back and reviewing the trades you’ve taken will give you an extraordinary view of whether you took the correct trade set up or not.
Reviewing your trades and analysing your trade selection is one of the best ways of being able to improve your trading ability. It’s like looking at your “trader-self” in the mirror and being extremely honest about what you’re doing right and what you’re doing wrong.
Not using a stop loss
Every trade should have three transactions. An entry point, a stop loss and a take profit. Very often though, you see new traders taking trades and not using an appropriate stop loss. This is bad trading practise because a key to trading successfully is to minimise your downside risk as much as possible. If you’re trading without a stop loss then you have no idea of what your risk is.
Another mistake unsuccessful traders make is that they believe that the trade will go their way due to the extensive research committed to a trade decision beforehand. This is not a good trading belief because the absolute truth of the financial markets is that you never know which way the market is going to go. As such using a stop loss at a point where you’re not willing to accept the trade going past is a best practice.
Not using a risk management strategy
Even with the most successful strategies, we never know which trade is going to go our way and which one is going to go against us.
For this reason, we need to have a definable risk management strategy. This means a strategy that is going to allow us to know exactly how much money we are going to risk on any one trade.
This could often be allocated as a percentage of your entire trading portfolio. Many traders will only risk 1% of their entire trading portfolio on any one trade. Having a definable, consistent risk management strategy is something everyone who is seeking consistency and success in the markets should develop.
Not following a definable trading strategy
To make consistent returns, traders need a strategy that details the exact conditions that need to be met before a trade will be placed. Without this, a trader is trading more on gut instinct, guessing and pure emotion which is not a recipe for success. A strategy needs to define which markets to trade, the time frames to consider, the technical analysis factors required, entry price, stop loss and take profit levels.
The strategy should also fit the trader’s lifestyle. This means that if a trader has a day job to focus on, then it’s unlikely that they would have the time to be able to dedicate 6 or 7 hours in front of a trading platform as full-time day traders do.
Not reviewing past trades
A lot of new traders miss a great learning experience by not reviewing their past trades. Generally, most new traders go from one trade to the next without considering what they are doing wrong and where they can improve.
As a trader becomes more experienced, they begin to realise that the outcome is just a way of keeping score. The true art of trading is to ensure that they are placing the trade as perfectly as they can, in the context of the rules outlined by their trading strategy.
Once a trader begins to seek perfection in the application of the trading strategy, understanding that the outcome of that trade is completely up to the markets, then they start to realise how important reviewing past trades is. Keeping records of past trades means we can check if we followed our rules perfectly.
Even experienced traders often find that, on review, they didn’t follow the rules as well as they thought they did. This is all part of the learning process and an important step in rectifying mistakes we may have made. We often only see our mistakes after the fact is because, as we place the trade, we are experiencing something referred to as “confirmation bias”. Confirmation bias is when we look for information to confirm our trading theory and discount anything that argues against it.
Confirmation bias can be damaging in trading and just being aware that it exists is a good start. This is another part of becoming self-aware. So keep a detailed journal including the trade direction, entry point, stop loss and take profit.
Most importantly, record the reason why you took the trade in the first place – what you saw in that moment led you to pull the trigger. You can spend thousands of pounds getting highly priced mentors that may guide you through the process of learning to trade. But one of the best forms of learning about your own trading is to review the trades you’ve taken and the reasons why you took them. This is perhaps the truest reflection of your progress as a trader.
