If you want to be a successful trader, then you need certain traits to help you succeed, but it is also important to avoid some of the following mistakes discussed below.
Don’t follow the crowd.
The smart money is usually the one that goes against the heard. Instead of following the advice of supposed market insiders, it is more important for traders to follow their own analysis and predictions. It is important that one’s trading plan tries to lead the market than to react to news or events that have already transpired. Don’t follow the crowd because there are a lot of uneducated traders in it.
Don’t second guess yourself
Maintaining trading discipline and executing a predetermined trading plan are requisites for making successful trades. Trades should be made with an entry and an exit strategy in mind. Trade discipline dictates knowing exactly at what point to get out of a trade to capture gains and to minimize losses.
Traders undermine their risk controls by trying to extend their trades to create additional profits. The extra profit does not compensate the trader for the additional risk taken. The best traders don’t second guess their trading plan and enter and exit their trades as originally planned.
Trade without emotion
No matter what anyone says the market is not a living thing so it cannot be beaten. No one can always profit. Losses will happen. The key is to minimize losses and to not let the occasional loss impede rational decision making. Too many traders change their tactics in mid trade because they let their emotions get in the way. The best way to lose money is too lose focus and trading discipline because a trade has gone badly. Never let losses run because you think the market will turn. It is always better to get back into a trade that has turned than to create losses that could have been avoided.
Don’t put your eggs in one basket.
Since losses are inevitable, the easiest way to ruin your budget and lose your trading portfolio is to take undue risks with a large portion of your risk capital. It is important to make an asset allocation with your risk capital that corresponds to your investment objectives. Diversification is important so that an unexpected market event doesn’t wipe out your entire portfolio.
Trade what you know
Traders should trade the markets and securities that they know well. Each stock will react differently to market events and news. It is important to understand the stocks that you trade in order to make good predictions about how their prices will change in the short term.
This goes for trading strategies as well. Many traders jump into new types of trades because they hear that someone else has had success with it. Risk control comes from knowing the strategy well and knowing how to adjust a trade when things go badly. The best way to find the strategies and stocks that best fit one’s trading style and risk preferences is to borrow the experience of other traders or to get a good stock market education. It is also recommended that traders have some success paper trading a new stock or strategy before committing the portfolio’s risk capital.
Don’t get greedy
Most of the mistakes created by inexperienced traders is because they get greedy. The saying goes “pigs get fed, but hogs get slaughtered”. There is plenty of profit available for the cautious trader. But the greedy trader that abandons their strategy, or delves into new markets, or commits any of the other common mistakes looking for extra normal profit will eventually get slaughtered. The key to avoiding all of these mistakes is to become a knowledgeable and disciplined trader.
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