When Day Trading, you risk to make some common (but terrible) Mistakes
While trading is an exciting business to be in, we have seen many people make simple mistakes that have cost them dearie. A common problem with the industry is that you can make good money only for you to lose it within a single trade.
This happens to people who are both getting started and those who are highly qualified.
A good example of this is Bill Ackman. Bill is one of the most respected hedge fund managers in the world. At his peak, his firm managed more than $15 billion. Then, three years ago he invested in a company called Valeant Pharmaceuticals.
Then, Valeant was one of the most beloved companies in Wall Street. He invested into the company when the stock was trading at $140, and then it moved to above $250. Then, problems started to arise and the stock started going down.
Ultimately, the stock fell to less than $10 and when he exited, he had lost more than $4 billion.
Another example was his bet on Herbalife. Herbalife is a company that manufacturers food supplements and uses a direct selling model. He accused the company of being a pyramid scheme and shorted it. His campaign led to a large investigation by the SEC. When the decision came, the company was asked to pay more than $200 million. It was also asked to change its business practices.
Ultimately, Bill lost more than $1 billion.
All Trading Mistakes you should have to avoid
In trading, we all make mistakes. From beginners to experienced investors, everyone can make decisions that will end up affecting your trading. But some of the mistakes you (probably) make can easily be avoided.
Don’t know when to exit: Average Down
Suppose you placed a buy position on Brent at $45 and then after a few hours, the price has gone south to $42. If you are fully convinced of your long position, you can decide to buy more oil. This is known as averaging down: a situation where you continue to buy an ‘asset’ that is going down with the hope that it will reverse.
This is usually a major mistake! You should always be ready to exit trades that are making losses. In this, you should always realize that all traders make mistakes. The problem of holding on to your mistakes is that it could cost you dearie.
Overconfidence risking too much
We always ask our traders to be confident in their trading. It is ridiculous to be a trader who is not confident in what you are doing. By being confident, you will be ready to buy assets that everyone is selling and vice versa. However, being overconfident is not recommended. By being overconfident, you will not be at a good place to exit trades that are not working out.
In several occasions, you might find yourself being overconfident and risking a large percentage of your account. For example, you might find yourself risking more than 20% of your account per trade. To avoid this issue, We recommend that you set a rule of never risking more than 5% in every trade.
Therefore, always be flexible in your trading.
Understimate the importance of having a Stop Loss
To prevent the first problem from happening, you should always have a stop loss for your trades. A stop loss is a tool that stops your trades when a certain level is reached.
For example, if you have bought the EUR/USD pair at 1.1200, your hope is that the price will move up. If the price moves lower to say 1.1150, you can place a stop loss at 1.1145. This will always ensure that you don’t make more losses than you can handle.
Risk management is also essential to succeed. Don’t make the common mistake of risking more than you can afford to lose. Be smart and use your protection tools!
Second your burnout
This is a situation where you spend a lot of time staring at charts that you forget about the benefits of taking a rest. When you are in a situation of burnout, you will likely make bad decisions!
A good way to address this issue is by proper scheduling. This is a process where you set a specific period of time where you will be trading.
You also should remember that every trade exposes you to some form of risk. As such, you should do your best to open a few trades as possible every day.
No Business Plan
Every successful business has a working business plan. What are you going to trade? How much money do you have to invest in your business? Do you have the right equipment? Do you have the right training? What specific goals do you have for your first year? How will you measure your success?
When you determine the answers to these questions, you can develop a real business plan to start your trading company.
If you don’t know which type of trader are you, and want to trade different currency pairs, different commodities, and equities, surely you will fail. Because this is not only brain draining but it is also inefficient!
The fact is that you can make money by just trading one currency pair, you don’t need to be an expert in everything.
No Action Plan & Risk Management
Once your business plan has been established, now you can create an action plan. A good action plan sets the stage for your daily trading. For example, establish the details on how you’re going to trade.
Do you know what signals to look for? Are you sure about entering a position or why you’d want to close one?
When you understand ahead of time what you will do with certain market opportunities, then you can avoid panicking like many unsuccessful traders.
Opening a Trade Without any Analysis
Many new traders take trading as gambling, but the fact of the matter is that you can’t open a trade without doing any analysis and expect to make money constantly.
You should always ensure that all of your trades are justified by both fundamental and technical reasons. At the beginning, this will be tough. However, once you have mastered your art, you will make money on a constant rate.
Becoming a successful trader takes time and analysis is part of it.
Trading Before and After Data Release
There are two facts you need to know. One, after the release of major news, there will definitely be major movements in the respective currencies and commodities. For instance, if the non-farm payrolls increase in the US, chances are that the dollar will gain.
The second fact is that there is no one who can forecast the numbers accurately. Therefore, one of the biggest mistake you can ever do is to trade right before and after the news. If you believe in your betting instincts, then you should always use very small lot sizes.
Betting big because of unrealistic expectations
Almost everyone dreams of getting rich quick. When it comes to the trading business, you can’t afford to have unrealistic expectations. Some people don’t want to make less money and let it grow. As such, they open large positions hoping that everything will work out fine.
This is a mistake which you must avoid!
The fact is that when you have a chance to make so much money, you also have a chance to lose it. Therefore, you should do the best to open small trades. By compounding your little profits, you will ultimately end up with more money than you think. This is also a mistake that Ackman did with his bet on Valeant: he bought a very big stake in one company.
If you enter the trading business with realistic goals and reasonable expectations, you’ll set yourself up for better success.
Follow Expert Opinion Blindly
We love CNBC and Bloomberg TV, or reading financial news and analysis (all traders should do the same). However, We don’t advise any person to follow their sentiments blindly.
Most of the analysts you see in Bloomberg are not that smart. others have clients who pay them to say what they are saying. Therefore, their projections are not always the best.
When We was a new trader, We watched an expert share his sentiments about crude oil. We was excited and went straight to our terminal and placed a trade based on what the guy said. Well, we lost thousands of dollars in that trade.