The Most Common Trading Mistakes

that Turn Traders into Gamblers Start Trading

Learning to trade like a pro can be daunting when you start out. From averaging down to
emotional trades, here are 10 of the most common trading mistakes made by novice day
traders.

31 Mar 2023 Forex / US | Blog | New Commodities / US | Blog | New

Indices / US | Blog | New 7 min read

 Kenneth Fisher
Market Analyst

Emotion is the trader’s worst enemy

Counterintuitive as it may seem, most novice traders hold on to losses and
! it out loud, sounds ridiculous. Yet,
let go of wins. Which, when you read
several studies have shown that it is the most common mistake made by
traders. So why would we do something so obviously unprofitable? At the
heart of this isn’t some complicated technical impediment to reason. It is
simply our humanity and the completely irrational but understandable fear
of loss.

The principle is simple.

When we start winning, we get anxious about losing our gains. We close
trades prematurely to capture the profit before the price starts to drop
again. We should be holding on to it and closing out just as it turns, which
would maximize the profit.

Conversely, when we start losing, we hold on to the losing position longer

in the hope it will turn upwards at some point. We have the irrational belief
that we will reduce or wipe out the loss.

This is the same principle that casinos exploit to keep unwitting patrons
pulling at the one-arm bandits until their bank accounts are emptied.

So, even if we have more winning trades than losing ones, the average size
of the wins versus the losses finds us in a net loss trading position over
time.

It is the most basic and destructive mistake any trader can make as it
spawns a host of further blunders that, if remain unchecked, can become
habits that are hard to break. Here are 10 of the most common trading
mistakes made by traders.

1. Unrealistic expectations
A common issue with new traders is how they define success as a forex
trader. Many enter the field with the notion that they can make a quick
buck and essentially win the lottery every day with a bit of luck. Trading is
not gambling. It requires a key set of skills, discipline, analytic abilities,
planning, and a long-term vision.

Temper your expectations and treat trading as a long-term endeavor and

not a night out at your favorite casino.

2. Trading without a trading plan

Another critical trading mistake is assuming that skill and practice are
enough. When we have no parameters against which to gauge the veracity
of our trading choices, we run the risk of succumbing to our emotions
without even knowing it.

A trading plan provides the necessary foundation on which to build a

consistent growth path towards profitability and includes clear objectives,
strong analysis, realistic expectations of profit (and losses), and reasonable
time horizons, among others.

3. Failure to cut losses

Letting a losing position run in the hope of a turnaround runs the risk of
wiping out both profits and capital. People often ask if day traders can use
stop-loss orders to minimize losses when a position starts to trend
downwards. The answer is yes. Limiting your losses through stops is a solid
tactic and can help maximize the value of your wins over time, but
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remember, stop loss orders are not guaranteed to get executed so keep an
eye on your trades.

4. Risking more than you can afford

Apart from minimizing losses and maximizing profits, many traders forget
to manage the risk of wiping out their capital as well. Setting limits on how
much capital you are prepared to risk at any given time is a useful strategy
to stay trading and not find yourself in an overexposed position. While
overexposure can maximize profits, it also amplifies losses and can signal
the shift from trading to gambling.

5. Reward/risk ratios
Once you’ve set your limits and stops, it is important to understand your
overall performance. In your trading plan, you need to set some goals
against a set of metrics. One key trading mistake many traders make is not
monitoring the average loss and profit per trade.

For example, if, on average, you lose $10 per losing trade and earn $15
profit per winning trade, then your reward/risk ratio is $15/$10 = 1.5. A ratio
of 1 is break-even, while anything above 1 is considered profitable.

This ratio provides an indicator of your overall success as a trader and

does not allow you to bask in the glory of big wins without assessing them
against your losses.

6. Averaging down or adding to a losing position

This is a common mistake made by many day traders who sometimes use
long trading positions to justify holding on to a short-term loss. The idea is
that you buy more in a losing trend so that when the price “eventually”
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rises above your opening position, you will maximize your profits because
you bought at a lower price.

As a day trader, you run the risk of the price never peaking above your
original position before the close of the trading day, and you end up
throwing good money after bad.

7. Leveraging too much

Leveraging, or the ability to borrow from a broker to make a much bigger
trade, is very tempting, especially when a trader’s capital base is small.

The OANDA Trade platform supports trading with leverage, which means
that you can enter into positions larger than your account balance and
trade without depositing the full value of the position that you wish to
open. One of the benefits of trading with leverage is that you could
potentially generate large profits relative to the amount invested. On the
other hand, trading with leverage could also result in significant, rapid
losses to your capital. It is important that leveraging is done within the
limits set in your trading plan to protect the capital base.

8. Trying to anticipate news events or trends

Once again, gamblers often try to anticipate a trend or news event and
hedge on the potential outcome of that event. A typical example would be
anticipating the announcement of a change in interest rates and hedging
that an increase might trigger a short on a particular currency.

While economic fundamentals are important to understanding the long

game, day trades are more vulnerable to other factors and require patience
before acting, even after the news breaks.
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9. Fear of missing out
The fear of missing out, or FOMO, on a big score is often triggered by a
news event or a trending meme on social media. Once again, fear is the key
motive and drives irrational decisions to trade even when it goes against
any parameters and strategies you may have set out in your trading plan.

10. Too many trades too soon

Diversification of trades can be a good risk-mitigation tactic. However,
diversifying too broadly and too quickly can lead to a number of pitfalls.
Too many trades across a diverse portfolio in a short time frame can lead to
information overload and silly mistakes.

Over-diversification can also lead to correlated trends that you may not
pick up immediately. This simply means that you may believe you have
mitigated risk only to find that your trades are linked, and you’ve achieved
the opposite.

Practice makes perfect

The biggest mistake made by beginners of anything is to assume that it is
easy to succeed. Trading is no different and, as with most endeavors, it
takes skill and practice to perfect.

Skill can be learned. There are myriad resources available online for the
beginner to garner knowledge and know-how. Whether you’re investing in
crypto or forex trading, it is fairly easy to get going.

Practice is equally easy to access through an online demo. Start a practice

account and simulate trades before you go live and risk your money. Apply
for a demo here.
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Disclaimer
This article is for general information purposes only. It is not investment
advice or a solution to buy or sell instruments. Opinions are the authors;
not necessarily that of OANDA Corporation or any of its affiliates,
subsidiaries, officers or directors. Leveraged trading is high risk. Losses
can exceed deposits. Past performance is not indicative of future results.
While technical analysis is a well recognized study, other analysis, such as
fundamental, may assert different views.

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