Mistakes are part of learning, and it is inevitable you’ll make a few on your way to becoming an experienced trader. But here are five common trading mistakes you can easily avoid.
1. Software dependence
Technology can empower your trading, but only when combined with a good working knowledge of underlying trading concepts. Overreliance on software can cause more problems than it solves. Make sure that you are familiar with the markets before you invest, even if you are using automated technology.
2. Bad timing
Mistiming trades is one of the mistakes made most often by inexperienced traders. Timing is by no means an exact science, but keeping a detailed log of all your trades, using charts to help forecast market behaviour and sticking to your trading plan can help you ensure that your trades are made at the right moment.
3. Not cutting your losses
One of the most potentially dangerous trading misconceptions is that a running loss can be turned around into a profit. Instead of letting bad trades drain your balance, decide your maximum loss for each trade as part of your trading plan, and stick to it.
4. Overreacting to wins
Winning streaks don’t exist in trading. The euphoria that comes with a successful trade can cloud your judgement just as much as running losses. Don’t let a big profit stop you from sticking to your trading plan.
5. Not calculating risk v reward ratio
Experienced traders will not open a position until they are sure of the ratio of risk to reward involved, and will decide what their risk appetite is before trading. For novice traders, lower risk is usually a better strategy. To calculate your risk v reward ratio, take profit you are aiming for from any trade and divide it by the potential loss. Make sure that any trades you make fit your risk profile.