Common trading mistakes: part two
Overreliance on software
Most people use some form of technology to assist their trading.
For example, you might study chart patterns or use automated alerts and algorithms as prompts to trade.
But, as useful as all of these tools are, it is important to remember that they are only tools, and must be employed wisely.
Just as your satnav can occasionally direct you to drive into a deep torrent of water because it doesn't know the river has flooded, trading technology isn't something to follow blindly. You still need to keep your eyes open and react intelligently to the signs you see.
So when using technology, such as charting software or other analysis tools, it's important that you understand the underlying concepts and the reasons behind what the charts are telling you. This will allow you to see the bigger picture and avoid unnecessary mistakes.
Lack of record keeping
Do you remember your first trade? What about the third, or the fifth?
If you're new to trading, the details may still be clear in your memory. But in a few months' time will you still be able to describe each step and decision in detail?
Unless you keep a trading log or diary, the chances are that this information will be lost. And if you can't remember what you did right, how can you replicate it? Similarly, if you don't know where you went wrong you could easily make the same mistakes again.
Your trading diary will let you look back at your experiences with the value of hindsight and learn from them. So what should you record in it?
IncorrectYour trading diary should contain details of each trade, the reason for making it and all the factors that affected it - including your emotional state.
As you build up a trading history over time, you'll start to identify patterns and work out which strategies are most successful for you. A detailed record of your past trading decisions and their outcomes will also help you avoid making the same mistakes in the future. It's an immensely powerful tool, but neglecting it is unfortunately one of the most common and costly trading mistakes.
Timing is not only the art of good comedy - it's also central to good trading.
In the same way that a stand-up artist needs to deliver the punchline at exactly the right moment, you need to time your entry and exit from a market perfectly to maximise any profit or minimise any loss.
Timing mistakes are common among new traders. So how can you avoid them? Although getting your timing right isn't an exact science, there are a few tools that will help you to act at the right moment:
- Chart analysis will help you forecast potential scenarios by revealing market patterns
- A trading plan will help you to define your strategy, meaning you're more likely to avoid impulsive actions
- Stops and limits will allow you to go about your business without having to monitor the markets constantly
- Remember the limitations of software and use it intelligently
- Keep a trading diary and reflect on the strategies that have worked well (or not so well)
- Use tools such as charts, stops and limits to help you get your timing right when opening and closing positions
Controlling emotions that hold you back4 min
Controlling emotions that entice you to trade4 min
Controlling emotions that cloud your judgment5 min
Developing an unbiased, positive approach4 min
Common trading mistakes: part one6 min
Common trading mistakes: part two5 min
Common trading mistakes: part three7 min