All of us are humans. Being humans, we are driven by emotions, mainly greed and fear. And making mistakes is very common. When it comes to trading, some mistakes are unavoidable. But it is vital to understand that you do not make them a habit and keep learning both from your successful and unsuccessful trades. With this in mind, below are the most common trading mistakes most traders make.
Minimal research and lack of homework
One of the most common mistakes that traders make is to trade with minimal analysis and not doing enough homework. New traders are generally found guilty of not doing sufficient research or not doing homework before they start to trade. Doing homework is essential because new traders don’t know about the time of data launch, trading patterns, and seasonal trends that seasoned traders have. It is a big mistake not to research a new investment that attracts you. Research can help you know about a financial instrument. For example, if you want to invest in a stock, do your homework about the company and its plans. Though it isn’t a simple task and other traders also have access to similar information, it’s possible to recognize a good investment by carrying out the research.
Trading without planning
A plan is a written record that outlines your trading strategy. It describes how, when, and what to trade. It should also outline the risk management rules you will follow and how you will exit and enter trades for both losing and winning trades. Experienced traders enter in a trade with well-defined trading plans always. They plan their entry and exit point, the maximum loss that they can bear, and the capital they can invest. However, beginners generally don’t think of making a plan before entering a trade. Although they have a trading plan, they may stray from the same as it is another mistake while trading.
Over-dependence on software
Some Professional Forex Trading Software can be advantageous for traders as they offer customization and automation to suit individual requirements. But, you should know both the advantages and disadvantages of the software to close or open positions. With software, you can carry out faster transactions as compared to a manual system. Advanced software has revolutionized the way we network with the market. But they lack human judgment as they can work only as they are programmed. Many software programs have been responsible for the market flash crash because of the fast-selling of assets in a temporarily declining market.
Risking more than you can afford to lose
You should find out how much capital you can risk on every trade. Ideally, you should risk less than one percent of your capital in one trade. Keeping this in mind, even though you lose many trades, you will lose only a small amount. And if you make over one percent on every trade, then your loss will be recouped. So, you should establish a percent for the sum you’re ready to lose every day. If you can afford to lose 3% in a day, you must discipline yourself and stop at this point.
Emotion-based trading isn’t smart trading. Emotions can cloud your decisions and make traders stray from their plans. After a loss or not getting an expected profit, traders can start opening a position without analysis to back them up. In such a situation, a trader may add needlessly to running losses expecting that it will increase eventually. However, it won’t make the market go in a favorable direction. Hence, stay objective while making trading decisions. Make your decisions on technical or fundamental analysis.
Choosing an inappropriate broker
Selecting to trade with the wrong broker is another mistake that you can make. If your funds are badly managed, the broker is an outright scam, or you find yourself in financial trouble with the broker, you may lose your money altogether. Take your time to choose a good broker. You should consider what you wish to attain and what does the broker offers. Then employ dependable resources for referrals. You should also test the broker by making small trades initially. Never accept their bonus offers at the initial stage.
Take correlated trades
If you like diversification, you may think of taking multiple trades simultaneously rather than a single one, believing that you’re spreading risks. But the possibility is that you are increasing your risk. If you find a similar trade arrangement in multiple pairs, there is a possibility that the pairs are correlated. So, you find the same arrangement in all. If the pairs are correlated, the pairs move together. So, you will either lose or win on all trades.
Trading based on economic data
You can make a bias depending on the content you recently read stating that the economic situations are bad or good for a specific currency or country. This outlook is irrelevant when it comes to trading. Your only aim should be to apply your strategy, regardless of which direction it asks you to trade-in. Use your trading plan and strategies as a guide in the trading world and avoid taking needless risks.
Failing to cut losses
It is another big mistake, and it is due to this mistake traders lose most of their money. Failing to cut on your losses can wipe away any profits that a trader might have made earlier. It is mainly true on short-term or day trading strategies as they depend on fast market movements to make profits. While a few losses are inevitable, stops can close positions that move against the markets. It can help minimize risks by cutting losses. You can also attach limits to your positions to automatically close a trade once it has secured your specified profit.
If you possess the capital to invest with skills and patience and can keep away from these mistakes, you can make your trades pay off. Getting good returns on investments can take you close to your financial objectives.