In trading, quick decision-making is one of the most significant parts of our job.
With the information continuously flowing and the numbers and charts on the screen constantly updating, it’s easy to get caught up and become overly emotional.
That’s why maintaining solid discipline and practicing good habits are good trading skills to have in your toolbox.
Today, I’d like to point out some of the most common and dangerous mistakes new traders may fall victim to and suggest ways to address them.
#1 – Adding to A Losing Trade
I could’ve titled this post “The Biggest Trading Mistake Ever” and left just this one item here.
I genuinely believe that this is the worst trading decision a trader can make, and it’s the first thing you have to develop a habit of avoiding if you’re serious about making it.
Look, I get the psychological aspect of it…
It’s never easy to admit you’re wrong and it’s ever-tempting to average down or up.
Every trader I know has done it and so have I.
There are 2 problematic aspects here:
You’re not following your plan / developing discipline
It only takes one to do damage!
Speaking of the former, let’s consider why you enter a trade.
You don’t get in and hope it all miraculously works out, right?
Instead, you evaluate multiple factors to determine what a stock is most likely to do next.
If what you’ve predicted isn’t panning out – well, it seems to me like your logic/thesis might not be correct.
Now you tell me, why are you adding to a position when your trade proves you wrong?
On the negative side… look, your job as a trader is to minimize risks to your account.
By adding to a loser, you’re potentially significantly increasing your downside exposure.
We often only consider how much the price action turns our way.
But the better thing to think about is how much damage will it do if all hell breaks loose?
Can your account handle a negative breaking news situation on 2-times or 3-times originally intended size?
#2 – FOMO Chasing
FOMO stands for Fear Of Missing Out and it means quite literally what it reads.
I think we’ve all been in situations where we get this tickly feeling inside urging us to do something.
And it always feels like there’ll be on other chance – this is what makes it so tricky to combat!
Well, in my experience at least, following those generally doesn’t end well…
It sure doesn’t in the market.
I can’t tell you how many times I’ve sold the bottom or bought the top, because I feared the stock would continue without me.
Look, let’s break this down into two important pieces:
Emotional Trading is no good.
As I mentioned above, a trade needs to be thought through. If you pulled up a stock, saw it running and decided you have to buy – doesn’t sound like you’ve put a lot of effort into this decision.
There’s always more!
Come on, it’s the market! Last time I checked, there were about 6,000 public companies in the US. What exactly are you fearing of missing out on? There’s always another good setup tomorrow, your job is to just be ready for it.
#3 – Not Knowing Why You’re In
This last mistake I see many newer traders make often pre-determines the two we’ve just talked about.
Let’s do a simple exercise: look at every trade in your portfolio and tell me – Do you know why you’re in it?
Whenever I take a trade, there’s a myriad of factors I consider.
My reasoning usually goes something along the lines of “A good piece of news just came out, the sector has been getting hot, this stock is reversing, breaking key resistance, people are getting excited, the float is low, the risk is tight.”
These are some of the criteria that might get me into a trade.
Can you name why you got into your trades? Can you list the specifics?
Or are you in it because a TV head or a twitter guy suggested it’s a good buy/sell?
Do you know where your stop is?
If you’ve found yourself doing any of the above, look, guys, do not beat too hard on yourself.
Such mistakes are a part of the learning process, we’ve all committed them.
I just hope that now that you’re aware, you’ll be able to eliminate the bad habits from your trading process.