Mistakes are the only way to get ahead in life.
While trading mistakes can be expensive and perhaps even frowned upon, without these mistakes, we would not have good traders or investors. Still, the trading and investing community often prefers to talk about their successes than failures.
In this article, I want to highlight give most common mistakes one can end up making while trading or investing and how you can be wary about this and avoid making the mistakes.
1. Don’t confuse investing with trading
It is not uncommon to see the words investing and trading being used interchangeably when you are reading an article about stocks or investing. But truth is investing is very different from trading.
Traders and investors think that keeping cash idle is losing out on an opportunity and thus they are always on the lookout for any trade that might justify them to trade. While there is some truth to keeping your money to work for you, it is incorrect to expect that every last penny of your money should be working non-stop.
In trading and investing, sometimes not trading is a strategy in itself.
Unless you own the underlying commodity, for instance, selling short is speculation, and speculation is not investment. Although it is possible, you generally do not invest in futures. A trader does not have to be concerned with making his money work for him.
A trader only needs to concern themselves with making wise and informed choices, thus speculating in a timely fashion. A trader must also focus on keeping their losses small and to exit the trade quickly when it is not working as planned. At the same time, a trader must ensure that they have taken the optimal profits from the markets and exit when their goal is met.
Some of the saddest calls I get come from traders who do not know how to manage a trade. By the time they call, they are deep in trouble. They have entered a trade because, in their opinion or someone else’s opinion, it was the right thing to do.
They thought that following the dictates of opinion was shrewd. They haven’t planned the trade, and worse, they haven’t planned their actions in the event the trade went against them. Just because a market is hot and making a major move is no reason for you to enter a trade.
Sometimes, when you don’t fully understand what is happening, the wisest choice is to do nothing at all.
There will always be another trading opportunity. You do not have to trade.
2. Don’t copy someone else’s strategy
A floor trader I know tells about the time he tried to copy the actions of one of the bigger, more experienced floor traders. While the floor trader won, my friend lost.
Here’s thing about copying someone else’s trading strategy. It doesn’t fit you. Remember that a trading strategy is very personal. A day trader is definitely not comfortable swing trade and vice-versa.
You may not be able to mentally or emotionally tolerate the losses his strategy will encounter. You may not have the depth of trading capital the person you are copying has.
This is why following a futures trading (not investing) advisory while at the same time not using your own good judgment seldom works in the long run. Some of the best traders have had advisories, but their subscribers usually fail.
Trading futures or stocks is so personalized that it is almost impossible for two people to trade the same way.
Most traders, when entering a trade, look only at the money they think they will make by taking the trade.
They rarely consider that the trade may go against them and that they could lose. The reality is that whenever someone buys a futures contract, someone else is selling that same futures contract.
The buyer is convinced that the market will go up.The seller is convinced that the market has finished going up.
If you look at your trades that way, you will become a more conservative and realistic trader.
3. Don’t expect to become rich with every trade
When I tell people that trading is speculative, they argue that they must trade because the next trade they take may be the one that will make them a ton of money.
What people forget is that to be a winner, you can’t wait for the big trade that comes along every now and then to make you rich. Even when it does come along, there is no guarantee that you will be in that particular trade.
You will earn more and be able to keep more if you trade with objectives and are satisfied with regular small to medium size wins.
A trader makes his money by getting his share of the day-to-day price action of the markets. That doesn’t mean you have to trade every day.
It means that when you do trade, be quick to get out if the trade doesn’t go your way within a period of time that you set beforehand. If the trade does go your way, protect it with a stop and hang on for the ride.
The greatest disappointments come when expectations are unrealistically high. Many traders get into trouble by anticipating greater than reasonable profits from their trading.
Investors end up getting into a trade and the moment that trade starts to yield profits, they end up already giving back those profits either by keeping the trade running for too long until the market reverses or by recklessly making the next trade and risking too much.
Reality is that you seldom make all of the money available in a trade.
I cannot count the times that I had for the taking hundreds or thousands of dollars in unrealized paper profits only to see most of those profits melt away before I was able to or had the good sense to get out.
One trader I know had $700 per contract profits in a short Eurodollar trade. The next day his position literally imploded on news of a 50 basis point cut in interest rates. He was lucky to get out with $350 per contract.
The money from trading often doesn’t come in as fast or as plentifully as you have expected or been led to believe, but the overhead costs of trading arrive right on schedule.
False profit expectations have caused aspiring traders to leave their job before they were really successful. The same false hope causes them to lose the money of friends and family.
False hope causes them to borrow against their home and other fixed assets. Too high expectations are dangerous to the well-being of every trader and those around him.
4. Ignoring your financial goals
Before you make a position trading decision, or before you begin a day of day trading, review your motives and your goals.
- Why are you trading today?
- Why are you taking this trade?
- How will it move your closer to your goals and objectives?
5. Taking too much risk
With all the warnings about risk contained in the forms with which you open your account, and with all the required warnings in books, magazines, and many other forms of literature you receive as a trader, why is it so hard to believe that trading carries with it a tremendous amount of risk?
This is somewhat akin to while understanding that you can lose money by investing or trading, you don’t really think much about risk at the moment as the prospects of making profits overwhelms you.
Blame it on greed which is the biggest culprit (emotion) that drives traders to take on more risk than they should. They get into too many trades. They put their stop too far away. They trade with too little capital.
I’m not advising you to avoid trading futures. What I’m saying is that you should embark on a sound, disciplined trading plan based on knowledge of the futures markets in which you trade, coupled with good common sense.