Thousands of people flock to the futures and forex markets every day hoping to make a lot of money. Trading is certainly a lucrative endeavor and there is a lot of potential to make it big in these markets. But like everything else, you need to be prepared, do your homework and avoid the mistakes of others who failed.
Here are some of the common mistakes that beginners need to avoid.
Lack of preparation and trading plan
Newbies should remember that trading is one of the toughest and most competitive professions. Beginners cannot simply enter the market hoping to improvise and succeed. They should have an entry and an exit plan. They should keep in mind that they will be competing with seasoned market professionals, commodity trading advisors, hedge funds and some major investment and trading institutions on the same playing field.
Traders should have a well-defined trading plan that includes the amount they can invest and the losses they can afford to take in addition to a thorough analysis of the markets. They should also have a daily routine to follow so that it will be easier for them to move up when they need or want to. It is also very important to stick to the plan. Most novice traders tend to stray from their plan or reverse their course altogether.
Failure to minimize losses
The primary role of traders is to manage investment risks. This can be effectively done with the use of a stop-loss order on every trade. Stop-loss orders are automatically executed once the parameters set by the trader are met to minimize losses due to adverse market conditions. There are some risks in stop-loss orders, such as slippage, but it still outweighs the risk of closing trades at an unplanned price.
Many novice traders prefer to use the so-called mental stop rather than a hard stop. They argue that they already have a predetermined level for exiting the trade and believe the market will go their way soon. But these arguments are flawed. If they already have determined the invalidation point, then a hard stop is the best risk control strategy and there is no need to stay on the trade. Staying in a losing trade can tie up capital and may result in more losses or depletion of capital. For their second argument, traders should remember that “the only certainty in the market is uncertainty.”
Inability to accept losses as a normal part of trading
Most novice traders often cannot accept the fact that they are humans and prone to make mistakes and tend to associate losses with failure. This is particularly true for those who are successful in their own professions like engineers, lawyers and doctors. They bring the mentality of always getting things right in the markets and this results in chaos on their psyche. Newbies are also affected by recency bias which means their trading decisions are influenced by their most recent performance.
Traders should learn to accept that losses are a natural part of trading to avoid having negative emotions when losing trades. They should train their brains to consider losses not as a reflection of their judgment or intelligence but as a necessary cost of trading. Professional traders understand that trading is all about probabilities and their emotional makeup is not affected by winning or losing a trade.