I’ve made just about every trading mistake you can make over the course of my almost two-decade-long career. I have also worked with thousands of students over the past few years, and I’ve seen from first-hand experience what the most common mistakes new traders make. Mistakes are inevitable in the beginning. But knowing what to look out for and what to do about them will help shorten your learning curve. Here are the most common mistakes new traders make, and what you can do to avoid them.
They Jump Straight Into Trading
Every new trader just wants to open an account right away and start trading. They don’t educate themselves beforehand about market structure, how to develop a trading strategy or learn about risk management. Most great traders spent months studying the market before they actually started trading. It is no different than any other profession. You need to get a thorough education about the markets before you can even think about trading any asset class.
Every new trader thinks they should be making a six-figure income by the end of their first year trading. They have no understanding of what realistic expectations are for account growth and trading progress. Trading is a game where 90%-95% of people lose money. You should consider just keeping your account alive for the first year a success. Your focus should not be on making money as a new trader. It is about refining your trading strategy and routine so that it can reliably generate income on weekly/monthly basis. Successful trading is not an overnight process. It takes months and even years to cultivate a strategy that is suited to your personality and lifestyle and to reprogram your brain for trading success.
Every new trader thinks they can make $1000 a day with a $5000 trading account. Unfortunately, there are a lot of trading services out there selling you this pipe dream, and it couldn’t be further from reality. The reality is that you need money to make money in trading. If you are looking to day trade, you need at least $25k in your trading account to be able to make more than three-day trades per week (if you live in the USA). There are ways around that rule but do not expect to turn $1000 into a million after one year. There is nothing wrong with trading a small account. It is a good way to refine your trading strategy and learn trading lessons without losing too much capital. However, if you are looking to make a full-time income from trading, you need to have at very least $30,000 trading account with a US broker. Learn more about how to trade with a small amount in this article here.
Too Patient With Losers
Losers should be your shortest trades in terms of your holding time. Unfortunately, this is usually not the case with new traders. They hold, hope, and get stubborn. Large losses can set you back months of hard earned gains. If you have trouble with cutting losses, use hard stops to take you out of your positions. Losses are inevitable in trading. You need to keep your losses small (that is a small portion of your trading account) to survive in trading for the long haul.
Impatient With Winners
This, in my opinion, is just as big of a problem for new traders as not cutting losses. New traders will often just take profits as soon as they are up a certain amount of money on a trade. They focus on their PNL rather than what the market is saying. You need to set profit targets before entering your trade so you will not be PNL focused. If you know where the stock should end up (ideally at a resistance level if looking long or at a support level if short). You will not make a living as a trader if you cannot be patient with your winners and let them play out to their full potential. You will almost never buy at low of day and sell at the high of day, but if you should consistently strive to capture the meat of the move.
I cannot tell you how many times I’ve seen new traders risk 20% of their account or more on a given trade. Oversizing will cause you to trade emotionally. When you are trading emotionally, you will not be focused on what the market is signaling. This will cause you to take a huge loss because you didn’t want to realize that big of a trading loss, cause you to stop out prematurely on a random move against your position, or take profits way too early. You should only be risking 1%-3% of your account size in the beginning. This will make trading a much more relaxing and enjoyable experience, and keep you in control of your emotions.
Compare Their Trading Journeys To Others
Comparing your trading progress or your PNL to others is one of the worst things you can do. Everyone learns at different speeds, and everyone has different account sizes and risk tolerances. You might see traders on Twitter making 2-5 grand a day and feel inferior because you have been red for the last 5 trading days. However, these traders are likely at a completely different stage in their trading career than you. They have probably been trading for 5 years and have a $100k+ trading account. It doesn’t matter what everyone else is doing. The only person you should be focusing on is you. “Don’t compare your Chapter 2 to someone else’s Chapter 20”.
Go Full-Time Too Early
So many new traders make the mistake of quitting their day job and then jumping into full-time trading way too early. Just because you had one green month does not mean you are ready to go full time as a trader. Trading as your sole source of income is extremely risky and stressful, especially if you are inexperienced. You need to have at LEAST one year where you make enough money from trading to satisfy your living expenses before you even think about going full time. The reality is you cannot generate trading opportunities. One good trading month does not make you a successful trader. You need to prove you can consistently make money from the markets over a period of months before you can even consider going full-time.
They Don’t Pick A Style of Investing and Stick To It
In order to succeed in trading, you need to find your niche. Is it day trading? Is it swing trading? Or is it long-term investing? You need to find a style that is suited to your personality, risk tolerance, and time commitment. I have seen new traders so many times turn a losing day trade into a long-term investment. You have to find your style, and stick to it. In the beginning, you have to find a very specific niche in trading that you can rely on for income.
Focused on Recent Results
In trading, you can never be focused on the day to day results. You have to focus on your weekly and monthly results to understand the strengths and weaknesses of your trading system. New traders get too excited about being green on the day, or too depressed about being red on the day. Trading is a game of probabilities, and no trading system has a 100% win rate. Literally, any person in the whole world could come to the market and make money on any given day. However, the professionals know that they have an edge and that over the course of a year they will make money if they stick to their methodology. You must have this mindset in order to become a successful trader.
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