Common trading mistakes: part three
Not cutting your losses
It's inevitable - sometimes things don't go to plan and you end up with a running loss on a position. There will be times when you can ride out the storm and eventually turn a profit, but on some occasions it's best to quit before the situation worsens.
So how can you tell whether you should hang onto your losing position or not?
IncorrectAlthough instinct can have its place in trading, experts generally agree that a more ordered, strategic approach is the key to consistent success – particularly for the less experienced. The right decision on any given trade may vary from person to person, but by using tools to help you stay objective, you’re more likely to make choices that leave you feeling satisfied with the end result.
Overexposure or underexposure
With an almost infinite range of financial markets and trading products to choose from, one problem a trader is unlikely to have is boredom.
However, sometimes it can be tricky to strike the right balance between, at one extreme, trying your hand at everything and, at the other, sticking only to what you know well. While it's risky to go too far outside your comfort zone or spread your capital too thinly, you shouldn't restrict your options excessively either. Just keep in mind, the wider the range of asset types you trade across, the more time and energy you'll need to monitor the factors affecting each one.
IncorrectA DIVERSE portfolio is a sensible way to spread RISK, but don't be tempted to enter markets you haven't RESEARCHED or don't fully understand.
Imagine the Dow Jones has been steadily moving upwards over the long term, when a worse-than-expected non-farm payrolls report causes it to tumble. Does that mean it's now in a downtrend?
Inexperienced traders might assume the answer is 'yes', but in fact that's unlikely to be the case.
A trend is the long-term direction a market is taking.
Generally this is determined by macro-economic influences rather than individual political or economic events. So, in our example, you might see the Dow resume its uptrend after the initial volatility subsides.
There's an abundance of software available to analyse market trends, and these tools can be valuable if used correctly. You should just be careful to distinguish between short-term and long-term influences, as these may not be aligned.
- Be disciplined about closing your trades to cut your losses when markets move against you
- Maintain a balanced exposure to a range of assets, while taking care not to diversify too far
- Remember the differences between long-term market trends and short-term reactions or 'sideways trends'
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