Trading is not easy. In fact, it can be one of the most difficult endeavors anyone can take on. Whether you have been trading for 6 months or 30 years, bad habits have a tendency to creep up. While there are many ways to lose money in the markets, there are 10 common mistakes that every trader, new or experienced, makes over and over again. When you can identify the mistakes, you give yourself a leg up in making sure they don’t affect you.
1. Misuse Leverage
Leverage is the only thing that separates futures and forex from all other investments. It is both misunderstood by the novices and misused by the semi experienced. Leverage is the cornerstone of why every trader both succeeds and fails in futures and forex investing.
This is both a blessing and a curse. While it is so exciting to imagine the possibility of making thousands if not tens of thousands of dollars from a few thousand, little attention is paid to the “what if” of loss.
This can express itself in one of three ways. Either they don’t understand the true value of the futures or forex contracts they are trading, they are looking to put too much money in one trade, or they trade too many different types of markets. Or it can be all of the above.
The key way to avoid misusing leverage is by taking the time to really understand what it can and cannot do. While leverage can help a good trader be successful, it cannot make a bad trader do better than he already is doing. In fact, it will actually magnify his poor decision-making skills and inability to trade.
If you have and use discipline when applying leverage and money management techniques consistently, then you will be able to have your use of leverage under control.
2. Confuse Speculation with Gambling
Speculation and gambling are not the same. As we have known, gambling involves chance, while speculation doesn’t. More importantly, how traders express their attitudes toward their money is the best example of the view they have of what they are doing.
The most disturbing of these views is the belief that the money they make in the market is actually “house money.” Somehow the money you make in the market is inferior to the money you brought to the market. This can be extremely dangerous in trade choice, stop-loss execution, and how profits are plowed back into your account or within various other trades.
Remember the words from The Richest Man in Babylon: Part of what you earn is yours to keep. This is too often overlooked when it comes to trading. You are trading to make money, don’t make the mistake of trading your profits back into the market solely because of some misconceived notion that you are trading with the market’s money. It’s all your money-don’t gamble it away.
3. Improperly Funding Account
Trading is a business, plain and simple. Like many businesses, it fails due to either too much capital or, more importantly, too little capital. When there is strong volatility that meets high ego, with a healthy dose of too little money in the account, disaster will ensue.
While there are commercials advocating trading spot forex with as little as a few hundred dollars, the question you must ask yourself is: Am I a “subsistence” trader or am I looking to thrive?
It’s been said that the average investor 20 years ago would invest $5,000 in the futures market. Fast forward to the present; that same investor still invests $5,000. With no adjustment for inflation and little thought to what the real-world equivalent should be, traders are still throwing $5,000 at the markets to get started.
Once you understand the markets you want to trade, you will then properly place the right amount of capital into the markets. Or you will change your approach to how you trade the markets. Whatever the case may be, attempt to find equilibrium, capital versus market, that will work for you, and don’t trade above that.
For markets where you may want to day trade, utilizing boosted or geared leverage is fine. Simply don’t trade the full number of contracts that you are capable of. If you have a $2,000 account that is allowed to be traded like a $20,000 account, don’t be afraid to use only one half or one fourth of the total amount available to you.
This goes for the spot forex market as well; just because you have 500-to-1 leverage doesn’t mean you have to use 500-to-1 leverage. Manipulate your leverage to your liking in order to make the capital you have last as long as possible.
4. Choosing Costs over Quality
Execution is only one aspect of commissions. There are many companies that offer barebones commissions in return for zero service. In fact, they do not even keep any licensed professionals on hand to deal with your problems and require that you keep a second account somewhere else to offset your trades in case there are any glitches.
Unlike many other investments, futures and forex in no way have reached critical mass, yet for those that are current traders price has been falsely been perceived as a “unique selling point” to the total abandon of all of the ancillary, but important features necessary to have an enjoyable trading experience.
Look for a mixture of full-service hand holding and fast execution in order to have a happy trading experience. If you don’t, you will find yourself in the same boat as 90% of most traders that switch brokers at least three times in their trading life.
5. Misunderstanding the Differences of Trading
Just because the most recent guru promotes “day, swing, or position” trading doesn’t mean that you are capable of emulating that same kind of trading. In fact by focusing on a style of trading instead of the markets to be traded will prove the downfall of the majority of novice traders time and time again.
It’s more important to become familiar with the margins, volatility, and rhythms of the market you are trading as opposed to artificially opposing time constraints on the market you are trading.
To recap the different types of traders:
Day trader: – A trader who holds positions for a very short time (from minutes to hours) and makes numerous trades each day. Most trades are entered and closed out within the same day.
Swing trader: A style of trading that attempts to capture gains within one to four days
Long-term/position trader: A commodities trader who holds a long position for the long term, usually five to seven months.
6. Trading without a Plan
Not operating with a trading plan is like going on a trip without a map. A proper trading plan assesses your risk tolerance and your profit goals. It is also the best tool to help you navigate between the demons of fear and greed. Unfortunately, too many traders confuse technical analysis systems with a trading plan.
You have to incorporate money management, technical analysis, and risk management together in order to make a proper trading plan.
7. Not Keeping Records of Your Trading
Statements are insufficient to keep accurate records. If you have ever read a futures or forex statement sheet it is one of the least friendly financial documents ever invented. Deciphering your activity can be like reading runes. So while the statement may show pluses and minuses in your account, they do not represent the logic behind the trade.
The best kind of record keeping for your trading activity is by keeping the charts, before and after a trade, and writing your notes directly on the chart. It helps you develop perspective on your logic and it is the most accurate real representation of your activity.
8. Looking for Trading Confirmations
There is a trading tool called the “Bullish Consensus” put out by Market Vane. Since 1964 they have tracked over 30 different markets. With this market sentiment index, they track various commodity trading advisers (CTAs) through their newsletters and advisory services.
The funny thing is when the Bullish Consensus reaches an 80% level of agreement, 80% of CTAs are bullish, and the market typically goes the opposite way. While newsletters and services have their place for “informational” purposes only, it is a sincere mistake to rely on someone else to give you your opinion.
Ownership of your decision-making process is infinitely more rewarding and reliable in the long run.
9. Options Are Not the Only Leveraged Investment
There is a misconception that options are easier to trade than futures. While 70% to 80% of options expire worthless, new traders get caught in the trap of feeling that if they know how much they are risking up front, as opposed to the freewheeling activity of futures and spot trading, they are safe. The problem with this logic is that there is a presumption that once you know the risk up front, then the risk is worth taking.
With so many components to option contracts, the Greeks, the strike price, the underlying spot and futures, if you trade options only, you will be disappointed. The key to investing success is by diversifying among the daisy chain of interdependence of futures, spot, and options. Let the trade dictate the actions, not the product.
10. Lack of Understanding Regarding Money Management
If you think that money management is about stop losses, then your battle has been lost even before you began. Money management is multifaceted and requires a set of money rules for losing trades as well as a set of money rules for winning trades.
You have to have well-developed money rules for trades that don’t develop and the proper number of contracts for your account size and risk level. You also have to be capable of having rules for trading frequency.
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