Traders and investors are known to make mistakes all the time. In the past we have seen some of the best traders lose a substantial amount of money. For example, a trader at Barclays lost more than $400 million within a few months.
Therefore, since mistakes are inevitable in the market (the numbers say that more than 80% of traders lose money), the goal of a trader is to minimize the risks.
In this article, we will look at some of the top mistakes that traders make in the market and how to avoid them.
Not Having a System Ready
The first mistake you should never do when you want to become a trader is on having a system. A trading system that you have created is a very important tool for you to use in your trading.
The system, which can either be manual or automatic will help you make important trading decisions. An automatic trading system is developed by taking a number of indicators and giving them instructions on what to do when certain parameters are met.
On the other hand, a manual system is one where you have to do the analysis yourself. The system that you decide to use should be backtested to ensure that it performs well.
Quitting your job when you don’t have a system can be very dangerous for you.
→ Related: Tips for Creating Effective Trading Algorithms
Snubbing a demo mode
A demo account is offered by most online brokers. It is a platform that gives you access to everything in a live or real account. The only difference is that a demo account has fake money.
A market simulator is useful for both newbie and experienced traders. The newbie ones use the account to learn more about trading. On the other hand, experienced traders use a demo account to test new strategies.
Therefore, a key mistake that you can make in the market is to ignore a demo account and go straight to a live one. Doing this will lead to substantial losses since you are yet to master how trading or a certain strategy works.
Not Having Enough Money
You should never quit your job unless you have saved enough money to last you at least one year. As a you are going to become a trader, you need to understand the risks that come with it.
Trading is a very risky area where you can lose all your money within minutes. Therefore, you don’t want to risk your job and then risk your life by not having a good contingency plan. You should work and save good money that can last you for at least one year. Then, you should trade using the remaining cash.
We have seen people who have left their jobs, lost their money, and lived a hard and stressful life thereon.
The solutions? Start trading part-time while you still have your 9-5 job.
Complacency at Work
Another mistake you should avoid at all costs is complacency at the work place. After you decide to quit your job to become a trader, you should not be complacent at your job place. Instead, you should continue working hard and giving all your attention to your work.
You should not reduce the momentum of your work just because you have your new ambitions of being a trader.
This is because there are chances you might return to the same company when trading is no longer profitable. You should treat all the colleagues and your boss in a respectable manner.
Not Having a Fallback Plan
Trading will not always work out. In fact, most people who start trading fail at one point in time. As you quit your job to become a trader, you need to have a fallback plan on what to do if trading fails to work. Having this plan will help you continue with your life if trading fails to work.
For instance, you can start a small business during this time.
Overconfidence
This is another mistake you should always try to avoid. As a new trader, you need to realize that there are five stages that you will go through:
- unconscious incompetence
- conscious incompetence
- the aha moment
- unconscious competence
- conscious competence
You should now take time to understand the stage you are in. We advise you to stay at your job if you are in the first 3 stages and then quit once you hit the fourth or fifth stage. Also, you should avoid counting your chicks before they hatch.
You should never budget for the funds you have not yet received.
Not mastering assets
The most successful day traders focus on specific assets. This explains why large institutional companies like Goldman Sachs and Morgan Stanley have traders focused on few assets.
There is a benefit of specializing in a small group of assets. The most important benefit is that you will be able to master these assets and become a better trader. For example, if you only focus on a group of five stocks like Apple, Amazon, Wix, Squarespace, and Chevron, you will have a good understanding of their price action.
Therefore, we recommend that you specialize on a small number of assets and then master them.
Not taking trading as a business
If you are trading on a full-time basis, then it is recommended that you take it as a business. This means that you should operate your account in a similar way in which people run their businesses.
For example, you should embrace the culture of record-keeping so that you can track how your business is doing. Also, if you are running a prop firm with traders, you should use a proper approach to hiring them. By so doing, you will be at a good position to know whether your trading is succeeding or not.
Not ready to deal with losses
As you will come to find, no trader is ever perfect. As such, you will make some significant losses in your trading journey.
Therefore, as you transition to become a full-time trader, you should be prepared on how to deal with losses. Most importantly, you should know how to minimize the amount of losses that you can make.
Final thoughts
Becoming a full-time trader is a huge undertaking because of the risks involved. In this article, we have looked at some of the most common mistakes people make and how to avoid them.
More external resources that can help you to Become a Trader
- 10 Steps to Becoming a Day Trader – Investopedia
