Many new traders launch into trading with great excitement and with an urgency to start making money right away. To this I would like to say, whoa cowboy.
There are many things to consider. The markets are not an easy place to make money at will, in contract markets like futures and options it is a zero sum game. Which means for you to make money someone else has to lose money,there is someone on the other side of each trade, you have to be right and they have to be wrong for you to make money. If you bought a stock and then it goes up then the person you bought it from missed out on the profits that you just made. The market can go in both directions, not just up. Stock trading is a lot like the game of survivor, you have to out wit (robust trading method), out last (risk management), and out play (trader psychology) to make money in the long term.
What mistakes do most new traders make?
- They trade first, educate themselves second. Read several books written by people that have made money in the markets. Research online about Rich Traders and their methods. Follow the twitter accounts of real traders that make money. Facebook friend successful traders if you have the opportunity. Learn to back test different systems to see how they performed historically. Study chart patterns and market history. Study, read, and grow.
- They are quick to take profits and slow to take losses. This makes your profits small and your losses big not to mention just very stressful. Do the opposite, let your flowers grow until they stop growing and pull your weeds immediately.
- New traders just trade too big. It is better to have a big win with a small position size than a small win with a big position size, why? Risk. You have to take small risks, like cutting losses when you are down 1% of total account equity on one trade. Why? So five to ten losses in a row do not remove you from trading sooner or later.
- New traders let the ego take over. The ego is a terrible trader, it brags about its wins, denies its losses and never admits when it is wrong. Trade with a plan not with an ego.
- They make up how to trade as they go. Before you place a trade you need to know your entry point, exit points, and the position size you will be trading and why you think it will be successful. Making this up as you go along is a formula for disaster.
- They never choose a trading style. Investors turn into day traders when fear drives them out. Trend traders turn into swing traders when they lose many times in a row. Day traders turn into investors when they just can’t cut a big loss. Choose a strategy and time frame and stick with it.
- They get greedy. Failing to know when to take a profit off the table when it begins to retrace can turn a winner into a loser. Have a plan for a trailing stop and how to exit with profits.
- Focusing all their efforts on entries and setups. The entry does not make you money the exit does. Focusing on how to cut losses when you are wrong about a trade and set trailing stops on winners is the real way to make money in the markets.
- Focusing on hot tips instead of correct trading. Developing a winning method, managing risk, and clear thinking is what makes money in the markets in the long term not trying to trade tips or be given trades. Tips are for waiters trading set ups are for traders.
- Following a guru. If a ‘guru’ is offering to sell you a secret system or formula instead of teaching you how to trade on your own then beware. You want to learn how to fish not be sold a fancy fishing pole they may only work in some waters.
“Narrow is the path that leads to trading success.”