Identifying the top 5 mistakes that traders make

Author: Forex Live | Category: Education

A look at the common mistakes that most traders tend to encounter

Everyone makes mistakes, that's why they put erasers on pencils. That being said, the potential to make mistakes in your trading is manifold, and it's important to familiarize oneself with the most common different issues faced by individuals.

There is a fallacy of the daytime trader sitting casually at home with nothing to lose. This couldn't be further from the truth as there is tremendous difficulty in trading as well as selecting the right instruments. Without further delay these are the top five mistakes that traders routinely make that you can be mindful of.

1) Absence of a trading plan

You have your trading account and there's a world of options or instruments to choose from so why not jump right in? This could be one of the most common pitfalls for traders as the lack of a clear trading plan for traders at the beginning of their path is due to inexperience.

As such, its crucial to construct a trading plan whether you are a novice or even veteran trader. This mistake is all too common, resulting in hasty or ill-conceived decision-making as a lack of research or familiarity with instruments can lead to losses.

Instead, a fruitful exercise is todetermine the solid parameters for entering and exiting the trade and follow them as closely as possible. Depart from the plan is permissible except in periods of increased market volatility to close the position and reduce trade risks. In the long-run, this tactic is generally more apt to yield positive results, although at the first glance it may look overcautious.

2) Problems with recognizing mistakes

Did you get unlucky, not your trade? Or did you truly recognize that you made an error. Often times people are likely to blame anything or anyone before themselves, which is why this mistake ranks so highly on this list with regards to trading.

Not recognizing your mistakes is a common error that can be related to overconfidence in traders' assessments of the situation. The market is always changing, and consequently a new important circumstance could appear. However, for newcomers it seems that they need only a little bit to stay calm and wait while loss disappeared and then there will be a reward.

Ultimately, your technique and forecasts could be relevant, though traders should not use these as a surefire predictor for future. Even the largest investment banks and international organizations are changing their expectations and forecasts. There is nothing wrong with it: nowadays the world is difficult to predict. Probably it was always like this, but now it is more often told.

3) Emotions

Nothing is ever as good or as bad as it seems. Still, it is worth noting that emotions are an integral part of trading for most individuals. The prospect or payoff of some nice trades often brings a healthy excitement and a competitive spirit to those for that are trading.

However, the reverse side yields an inverse effect on traders that can trigger deep sorrow with loses or outright depression. Greed and fear lead to mistakes and these emotions should be dispelled for any longer-term trader.

Instead, make your goals for the day and tune your trading strategy on a shorter-term basis. In doing so, this technique allows a trader to reduce a level of emotion and better control or minimize the number of spontaneous decisions.

4) Always buy low and sell high

It's so easy when you look at a chart in hindsight to identify the highs and lows. In real time however, this practice is slightly more complex or unpredictable. What seems like a good moment for reversal at first glance can very often turn out to be a small stop in the midst of the trend.

Don't be lulled into knee-jerk moves as a result of this narrow line of thought. Instead utilize a range of tools such as oscillators (technical indicators) that are helpful to determine entry/exit moments. Moreover, by estimating the strength of the current price trend, you can be better informed to execute your strategy.

5) Overconfidence in your trading strategy/performance

You are on a roll and can't be stopped. Maybe it's time to rethink your career after the stellar month you have just had trading...then the wheels come off. On the opposite side of the spectrum from having no trading strategy is being overconfident in it.

After the trader has tested it on very long historical data and if it has successfully had worked out for several months before, it is rather difficult to take a critical look at its shortcomings. A series of losses at first glance seems only a black stripe, which is about to end.

It is paramount that a trader always needs to keep an open mind to the notion that the market can change dramatically and unexpectedly. The economy can enter next macroeconomic cycle phase, the policy or other economic conditions could have changed, or seemingly any different scenario could be a game changer.

Strategies should be time to time subjected by a critical review for relevance, sometimes by your colleagues or another set of eyes. Critical thinking is one of the best lines of defense against a seemingly bulletproof strategy.

- This article was submitted by LegacyFX

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