1)Position Size
One of the most common mistakes made by new traders is the lack of any discipline when it comes to position size. This mistake is especially prevalent in leveraged markets such as forex and futures. The ability to control a large amount of currency or commodities with a small amount of money is quite enticing as it allows the trader to make large profits off of relatively small movements. Quite often, the trader will come into the market with unrealistic expectations of profits that are available. Most of the time, this comes down to something they have heard during a presentation or sales pitch about the markets. Quite often, the person selling the system or education that they are using makes claims of outlandish gains in a relatively short amount of time.
Unfortunately, the average person completely ignores the warnings that most regulatory bodies insist on these people posting. If you ever look at the “fine print”, you will see mention of the fact that leverage, and for that matter markets in general, can work both ways and you can possibly lose the entire principal you trade with or even more money. This is a fact that most people seem to be willing to ignore, but only seem to focus on the claim that the system or trader using the education made hundreds of percent in gains over the year for example.
One of the most common mistakes made by new traders is the lack of any discipline when it comes to position size. This mistake is especially prevalent in leveraged markets such as forex and futures. The ability to control a large amount of currency or commodities with a small amount of money is quite enticing as it allows the trader to make large profits off of relatively small movements. Quite often, the trader will come into the market with unrealistic expectations of profits that are available. Most of the time, this comes down to something they have heard during a presentation or sales pitch about the markets. Quite often, the person selling the system or education that they are using makes claims of outlandish gains in a relatively short amount of time.
Unfortunately, the average person completely ignores the warnings that most regulatory bodies insist on these people posting. If you ever look at the “fine print”, you will see mention of the fact that leverage, and for that matter markets in general, can work both ways and you can possibly lose the entire principal you trade with or even more money. This is a fact that most people seem to be willing to ignore, but only seem to focus on the claim that the system or trader using the education made hundreds of percent in gains over the year for example.
The biggest mistake that most of these new traders make is to trade large positions sizes as a result of these extreme claims. The average trader has no idea when they start out what a difference risking 1% of your account per trade makes as compared to 10%. The simple fact is that you can indeed make more money if you risk more, but the reality of trading is that there are always going to be losses. The simple mathematics of the trade is that a loss of 10% is a much more significant loss than 1%. Most traders don’t take into account that a 10% loss takes a gain of 11.1% just to get back the money you lost on that trade. When you have a string of losses, the compounding difficulty can make for an almost impossible task. The idea that you will have losses leads to the next common mistake…
This one can cause a lot of problems for the trader. The tricky part about this is the fact that you get into trading in order to make a profit, so it makes sense that it is the part you would be most interested in. However, trading is about making money overall and not necessarily in a few short minutes. The main reason of course is the sheer randomness of events and fluctuations in the markets.
2)Focusing only on potential gains
The truth is that you will have losses; there is nothing that can prevent this. The market will make sudden moves based upon headline events as an example. No matter how much you plan your trades out, there is absolutely no way you can predict that some political scandal involving the European Central Bank or other such unforeseen event will come and suddenly move the market against you. Because of such problems with the human nature of the trading crowds, you simply must have an idea when the trade is no longer working in your favor. There is always going to be a point in which you know the trade was wrong, and if you are not looking at the possible losses as well as the gains in any trade before putting it on, it is very likely you will find out the trade is wrong when you have taken far too large of a loss to recover.
The truth is that you will have losses; there is nothing that can prevent this. The market will make sudden moves based upon headline events as an example. No matter how much you plan your trades out, there is absolutely no way you can predict that some political scandal involving the European Central Bank or other such unforeseen event will come and suddenly move the market against you. Because of such problems with the human nature of the trading crowds, you simply must have an idea when the trade is no longer working in your favor. There is always going to be a point in which you know the trade was wrong, and if you are not looking at the possible losses as well as the gains in any trade before putting it on, it is very likely you will find out the trade is wrong when you have taken far too large of a loss to recover.
3)System Hopping
Another big problem that new traders will create for themselves is the mistake of system hopping. The average new trader is introduced by some kind of sales pitch, and then will often hear of legendary bank traders and other such urban legends in the trading world. Unfortunately, this leads to more of the unrealistic ideas mentioned earlier. The truth is you can make quite a bit of money trading the markets, but the business of trading is like any other business, returns are relative. In other words, a 5% return is a solid return at any account level. However, if it is a 5% return on a $1,000 investment, it is only $50. With a larger account, the return is much larger. This can often lead to switching trading systems frequently because the trader doesn’t feel that they are making enough money, and certainly not fast enough!
Another big problem that new traders will create for themselves is the mistake of system hopping. The average new trader is introduced by some kind of sales pitch, and then will often hear of legendary bank traders and other such urban legends in the trading world. Unfortunately, this leads to more of the unrealistic ideas mentioned earlier. The truth is you can make quite a bit of money trading the markets, but the business of trading is like any other business, returns are relative. In other words, a 5% return is a solid return at any account level. However, if it is a 5% return on a $1,000 investment, it is only $50. With a larger account, the return is much larger. This can often lead to switching trading systems frequently because the trader doesn’t feel that they are making enough money, and certainly not fast enough!
Generally, they will have a loss or two, and feel that perhaps the system is junk. Maybe it isn’t working in the current environment, or perhaps the person that sold the system to them was offering junk. None the less, the system has produced a few losses, and all of the sudden the trader goes onto the new big thing. The constant hunt for the “Holy Grail” trading system that will produce almost no losses and almost all winners is a fruitless pursuit that far too many traders get themselves stuck in. The truth is that a system that is proven over time is just that, proven over time. This doesn’t mean that there are no losses, just that on the whole, the system makes money. However, far too few traders are willing to give it long enough to prove itself. If you are constantly new to whatever system you are using, you never learn to trust it. Not trusting the system is a part of the next major issue.
These are some of the points you missed above. Could be useful
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