New traders come to trading excited about learning, and looking for a fast path to riches. The majority of new traders can make big mistakes that take their accounts to zero during their learning curve. Traders can grow their capital if they do it correctly, but there are dangers that new traders should be aware of. I hope this blog post saves you a lot of money if you are a new trader, or refreshes your memory if you find yourself tempted to play big and loose with your trading capital. Here are some of the dangers:
- Trading too large a position size due to overconfidence of an entry signal. You must limit your trade size to safe levels, and not let faith become your position size metric.
- Taking positions in markets that are not liquid enough to handle your trade size. You can lose a lot of money fast by getting in and out of a trade with a wide bid/ask spread. The options market in low volume stocks and penny stocks are the worst for this.
- Holding on to a losing trade and not taking your initial stop loss. Getting caught on the wrong side of a trend can turn a small loss into a big loss. Big losses are the number one cause of unprofitable trading.
- Adding to a losing trade. This can turn a small loss into a big loss that the ego becomes invested in holding.
- Thinking that you will get rich quick. The stronger the urge to get rich quick, the greater the odds that a new trader will take the risks that will lead them to ruin. Slow and steady wins the trading race.
- Being under capitalized. Trading an account that has not accumulated enough capital can cause a new trader to take too big of a position size, and take too many risks. Profitability will be nearly impossible, as commissions will be too high of a percentage of each trade. Serious active trading requires at least a five figure trading account. The markets will be here when you are ready.
- Trading markets you do not understand. Trading Forex, futures, or options without a full understanding of how they work, and the risks involved, is a formula for disaster. You must gain competence in these markets before you will be successful.
Avoid these dangers and stick with what you know. Trading is a marathon and not a sprint. Make sure you are running in the right direction before you start the race.