In the trading arena, it is inevitable that traders across the globe will commit mistakes that will result in small or massive trading losses with regard to their trading capital. This is especially applicable to beginner traders who possess little or minimal real life trading experiences in the areas of asset classes such as currencies and commodities. Today, we shall explore and look at what are some of the most common mistakes committed by traders in present day context.
1. Failure to Master the Art and Science of Psychology of Trading
In times when traders committed a lost trade, many tend to get emotional over it and often attempt to try and recuperate the losses incurred aggressively immediately after it. What this implies is that in a bid to recuperate the losses incurred from the losing trade, they would seek to assume higher leverage and take on higher risk with a view to register high winning returns so as to venture back into positive territory within the shortest possible time. As a result, instead of achieving their objective of venturing back into positive territory, many actually ended up incurring even more losses, causing massive adverse implications with regard to their financial health, position and trading portfolio. In this case, a feasible suggestion may be to accept the original losses incurred outright and concentrate on analyzing and examining the fundamental reasons for the losing trade. It is also advisable to determine what are the appropriate measures that they can adopt to avoid committing the same mistake and improve on their subsequent trades during this process.
Alternatively, another common mistake with regard to the psychology of trading is that upon incurring a losing trade and despite the existence of exit signals, many traders also tend to allow this trade to get stopped out at the stop loss level instead of closing their trading position early to cut loss. This is particularly evident upon the fresh release of new important economic news or report that leads to price reversal or causing the price to move against their trade position. As a result, instead of exiting early, many ended up incurring maximum losses at the stop loss level. Here, even though a stop loss has been inputted by the traders, the act of waiting and allowing the price to get stopped out in the presence of an evident exit signal may reasonably constitute to poor risk management practices displayed by them. A feasible suggestion may be to close or exit the position in event of the presence of an exit signal. By doing so, the traders could reasonably reduce the absolute amount of potential realised losses. In short, it is highly advisable to adhere and subscribe to the following trading principle:
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If you take reasonable steps to address your downside potential in a trade, the upside potential will take care of itself.
2. Trading Without a Framework and Stop Loss
As the saying goes, if you fail to plan, you plan to fail. This is particularly applicable to the investing and trading arena. Very often, many traders find themselves incurring small or massive losses due to the absence of a discipline and relevant trading framework. In the trading context, to be a good and successful trader, you need to establish a strong trading framework. Here, we are essentially referring to the definition of your trading time horizon, establishing your risk management practices and the adoption of relevant technical indicators to validate any trade decisions. Construct these with due consideration to a trading framework and subscribe dearly & religiously to it. The primary reason for doing so is because the presence of a good trading plan/framework will assist traders to identify good entry and exit points so as to increase the probability of a
winning trade. Therefore, to trade well, it is highly advisable for traders to establish a strong trading framework and guiding principles as a basis for the execution of any trading decisions.
The absence of a trading framework will often lead to traders executing trade decisions without the establishment of relevant stop loss levels. As mentioned earlier, if you take reasonable steps to address your downside potential in a trade, the upside potential will take care of itself. In this instance, by not placing or establishing a stop loss for a particular trade, the trader is not taking reasonable steps to address his/her downside potential. In fact, the trader’s downside potential is unlimited as a result of this act. The burning question then will be as follows:
Why should a trader establish a relevant stop loss for a particular trade?
Well, by establishing a predetermined stop loss point for exit purpose, this act provides the benefit of limiting your downside potential and removes the anxiety caused by being in a losing trade without a plan. In other words, by taking reasonably steps to limit your downside potential, you are subscribing to basic risk management practices. However, as mentioned earlier, a trader should pay special attention to any potential evident exit signal surface and not rely entirely on the stop loss in the execution of any loss exiting position.
All in all, it is inevitable that many traders (all levels) commit mistakes in their trading journey to wealth creation & accumulation. The key is to limit the number and amount of mistakes committed so as to maximise trading profits and minimise losses. Again, as the saying goes, if you take reasonable steps to address your downside potential in a trade, the upside potential will take care of itself. Therefore, seek to limit & avoid the frequency and magnitude of mistakes committed and you will find yourself to the path of trading excellence in your trading journey to create and accumulate wealth.
This post is contributed by Sam Goh. He is a dynamic youth who has build up his credentials as the Wisdom Capital Founder, Money Sensible Youth Ambassador, Associate Financial Planner, and committee member of FISCA. He runs a two-day Technical Analysis course.