Ten mistakes that beginner traders make

1. Trade without a plan

The vast majority of novice traders begin trading in the forex market without a plan. Regardless of whether you want to make money on the exchange regularly or prefer a passive source of income, the creation of a trading plan plays an important role. Otherwise, investment and speculation turn into an unprofitable gamble.

The only exception when you can do without a plan is to use a ready-made portfolio or financial advisor services. In this case, you follow the developed investment strategy, so making mistakes will be minimal. However, to gain independence in the securities market, the first thing you need is a trading plan. In it the trader fixes the following key points:

  • preferred trading style: scalping, intraday trading, swing trading (the position can be held for several days) or long-term investment;
  • analysis method: technical or fundamental;
  • selection of trading sites: local or foreign securities market; stock market, derivatives or foreign exchange market;
  • risk management: determining the maximum risk per transaction, the allowable deposit drawdown per month, the ratio of profit to risk for one position;
  • trade entry rules and other aspects.

Following the trading plan allows you to make deals systematically and deliberately. Over time, skills will improve, increasing trade efficiency. You will learn to understand whether you made a mistake or the market simply behaved differently than in most cases.

It is also a mistake for newcomers to open a “random” deal. Any purchase or sale of securities should be made after analyzing the situation in accordance with the trading plan. Before the transaction, a forecast is made that answers the questions:

Why the price can test a particular level with a greater probability? Factors for and against. At what prices to record profits or losses and why?

2. Trade without preparation

Before you start trading with real money, analyze a large number of graphs. Observe price movement using technical indicators and determine support and resistance levels. Try to find different patterns (figures, Price Action or other patterns) on charts with different timeframes. Understanding technical analysis is useful not only for speculators, but also for investors, for whom it is equally important to open and close a transaction at more favorable prices.

If your trading style is swing trading, you also need to understand the impact on the price of news. With medium-term and long-term investment, the fundamental analysis of the company and industry analysis are connected. At the same time, an understanding of what is happening in world markets as a whole will not harm any trader. Such information will be completely useless only if you are a scalper.

3. Overconfidence

Receiving the first income in the stock market, beginning traders often have a false idea of the simplicity of earnings. The problem is especially acute if the trader has earned a large amount of money.

Often, a novice investor or speculator mistakenly believes that he can benefit from virtually any price movement. Excessive self-confidence leads to the opening of the order without the necessary analysis with a “cold” head. When a position becomes unprofitable, the situation is aggravated by the desire to recoup, usually resulting in even greater losses.

A similar effect occurs in novice drivers of cars: some time after getting used to driving, the driver becomes overly confident in his abilities, starting to drive a car faster and more aggressively. However, due to the lack of experience it is during this period of driving that the probability of an accident sharply increases, which is confirmed by statistics.

At the other extreme, there is excessive trust in outside sources. You can not fully rely on someone else's, even expert, opinion. Analyst recommendations can be used to confirm or “fit” your own forecast, but no more.

It is impossible to learn systemic trading with regular adherence to forecasts of various sources. If you trying out other people's ideas with own money, there is a high risk of capital loss. If you are not ready to make informed decisions about transactions, then you are not sufficiently prepared for independent trading.

4. Unwillingness to fix losses

Making a deal you are counting on rising or falling prices. In case of an unfavorable price change, it is necessary to fix the loss in time, otherwise the losses increase and become uncontrollable. As a result, the growing negative simply can throw you out of the market.

Suppose the price has reached the value at which the loss should be fixed. It may seem to you that the market situation will soon change, and the price will turn in your direction. But it is better to limit losses in time and not to “endure” the increasing minus. Holding an unprofitable position does not guarantee the return of the price to the initial value and prevents from making new promising transactions. At the right moment, you can reopen the position (re-enter the transaction) if the price forecast remains the same.

A reliable solution to the problem of timely and fast exit from a losing trade is placing a stop order at the same time as opening a position.

5. More risk - more money.

The higher the risk, the higher the earning potential. But the flip side of the coin is that with an increase in risk, potential losses also increase. It’s not for nothing that experienced traders usually allocate no more than 1-5% of total capital by one position.

The maximum risk can be justified only in one case - during the “overclocking” of the deposit. By fully utilizing the leverage, the professional trader increases the risk to the limit and maintains it at the maximum level to multiply the small deposit to an acceptable size. At the same time, during the period of “acceleration” of the deposit, even a small unfavorable price change entails serious losses, up to a loss of all the capital. Therefore, the strategy can be used exclusively by experienced speculators who were able to show a good financial result with a low level of risk for a long time (from a year).

6. Fighting the trend

Suppose that shares are dominated by an upward or downward trend movement. By opening a position in the opposite direction of the trend, the investor assumes unreasonable risks. Attempts to "catch" the reversal of the trend simply exclude making profits in the long term, since in most cases such transactions will be unprofitable.

Do not try to "short" the stock in a rising market. If you feel that the fall will end soon, wait for the appearance of reliable technical signals on the trend reversal. Even if a company is attractive for fundamental reasons, a persistent falling trend can continue for a long time.

It is necessary to remember the key point: a strong fall of the tool does not guarantee that the price will not go even lower. Instead of trying to take part in the formation of the "bottom" of the market, buy paper after the price has turned confidently. With experience, you will learn how to determine the moment of trend change earlier.

After the price stops or adjusts down, it may seem that the trend is about to unfold. Nevertheless, quotes continue to grow almost continuously, changing the trend only after the breakdown of a strong price level.

7. Position averaging

Position averaging is a decrease in the average price of a position by buying additional shares at a lower price. That is, if after the purchase of securities their price began to decline, the additional purchase of shares reduces the average price of the entire position. The principle works similarly for a short position (sale of an asset), only papers are sold at a higher price.

Never use this method, especially if you are not an experienced trader. Unsuccessful investments should be immediately sold - so you fix a loss, not allowing it to grow.

The only case in which averaging can be justified is long-term investments. Buying shares of a stable company and holding them for more than a year, an investor can purchase additional shares at a fallen price, which increases the potential profit. But since the potential loss is also growing (in the event of a further price drop), the strategy has the other side of the coin.

In order to avoid averaging, a number of investors use technical analysis. It allows you to take into account the current market sentiment and enter the transaction at a better price. In this case, the price drop below a certain level tells the trader that he has incorrectly interpreted the attractiveness of the securities. In this case, it is easier to fix the loss without aggravating the situation by averaging.

8. Unrealized profit or loss

There is an erroneous opinion that a loss (or profit) is not "real" if the position is not yet closed. However, your portfolio is worth exactly as much as you can sell it on the market right now. Uncommitted loss is still loss.

Many newbies and even experienced traders are reluctant to close an unprofitable position due to their inability to accept the fact that the price has gone against their forecast. Here there are various emotions, stubbornness, pride, which prevent quietly fix the loss. As a result, the loss continues to grow further without any guarantee that the price will return to its previous level. This can lead to excessive losses, which are then hard to replenish. It is important to realize that if stocks have fallen by 50%, then to achieve the initial value they need to grow by 100%.

9. Favorite stocks

For various reasons, some investors mark stocks that they find particularly attractive. It is not necessary to do this, since in case of a collapse of quotations it will be difficult to get rid of them in time. In general, a growing stock can become unprofitable at any time. While you are focused on personal favorites, you miss the opportunity to make money on fast-growing papers.

It is necessary to understand that the shares of an "excellent" company may well not grow in the short term. Often promising stocks show a mediocre trend, disclosing value only in the long-term horizon. This is because fundamental analysis does not take into account current market conditions, including investor interest in the purchase of certain securities.

10. Use of borrowed funds

Do not replenish the brokerage account with credit money. The loan requires a regular return of funds with interest, which exerts psychological pressure. You are pursued by the idea of the need for constant earnings from the exchange. But this is impossible, since the market does not "distribute" money according to your personal desire, but provides an opportunity to make money during favorable periods of time.

In stock trading, free capital should be used. And if you adhere to high risks (for example, when trading futures with leverage), then psychologically you should be prepared for the loss of most of these funds due to unforeseen circumstances. Never trade on last or borrowed money.

If you follow these 10 rules, the chances of success greatly increase. If you love trading, spending enough time on system trading and error analysis, then sooner or later you will find your own way to profit. The main thing is not to consider the market only as a source of income, otherwise failures will not be perceived as an experience, but will only lead to disappointment.

Author: Kate Solano, Forex-Ratings.com
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