Trading Disasters - Part 1

Nothing is certain in trading but to give yourself a winning edge make sure you avoid these 8 common mistakes:

1. Never trade with money you can’t afford to lose.
It’s a classic mistake that is just a recipe for disaster. If your next trade just has to be a winner or else you won’t be able to pay the rent or buy food for the family then you just can’t trade objectively. Generally this is referred to as “trading with scared money”. Trading with scared money will always lead to trading out of emotion rather than logic.
If you are in this situation then stop trading immediately. Make sure you have your monthly expenses covered and put a regular amount away for a ‘trading fund’. Only trade again when you have sufficient to cover your trading system’s estimated requirements.

2. Don’t wait for the perfect trade.
Nobody enjoys a losing trade, unfortunately that’s just part of the game. It’s easy to sit back and demand more and more confirmations that the trade that you are about to enter is going to be profitable. Perhaps you tune into Bloomberg and wait for the commentators to agree with your view or just wait a couple of days to be absolutely sure that the breakout that you saw happening really is happening. Perhaps you ask your friends and colleagues what they think. Alternatively, some traders have a list of a dozen indicators that all have to show green before they press the button.

Not being reckless and demanding a little confirmation is a good thing. When taken to extremes though will lead to severe procrastination. If you find yourself always saying ‘I knew that trade would be a winner, if only I’d got on it sooner’ or you start chasing trades long after the opportunity has gone just because you saw it first then you know you need to cut down on the confirmations.
Just remember there are no guarantees in trading. Be confident in your system and take the trade as soon as it is signalled.

3. Don’t get carried away by a large winning trade.
If you trade long enough eventually you’ll have a ‘spectacular’. Making 50% in a week or doubling your money in a month. Suddenly you start to feel invincible. You calculate how quickly you’ll become a millionaire and you start to browse the Ferrari or Aston Martin websites!
The market has a nasty habit of bringing such dreams down to earth and all too often you can find your best month ever is quickly followed by your worst week ever where you lose everything you made and more.
Always remain focused on your trading system. Don’t start to think you can outsmart the market.

4. Don’t have your own opinion.
Your opinion means nothing to the market. You are one person against tens of thousands of other traders. If you’ve ever found yourself screaming at your trading screen that the market is wrong then you need to let go of your own opinion and follow what the market is doing.
Perhaps your opinion on market direction for the long term is correct but in the short term all those differing opinions of all those tens of thousands of other traders can cause wild fluctuations on any particular day.

Continue to part 2 of trading disasters and how to avoid them