Many novice traders charge into the markets with sky-high expectations, but they quickly discover that trading isn't as easy as expected.
And truth be told, anyone with an Internet connection, a few hundred dollars to spend, and several hours to invest every day could trade the financial markets. But those factors are no guarantees for success. In fact, plenty of people fail to understand and grasp the basics of trading. Therefore, they keep making the same mistakes all over again. Eventually, these errors will discourage them, to say the least.
Before diving into the exciting world of trading, consider these 5 most common blunders you should avoid. Knowing them will serve you well and could give you a head start.
1. Failing to create a trading plan
Trading without a plan is a recipe for disaster. Unfortunately, many new traders don't bother to build one before they jump into the markets. And even if they do scrap a trading plan, they often tend to ignore it.
Efficient investors always follow well-defined guidelines. They know their exact entry and exit points and how much they're willing to spend and protect their funds.
If you don't set up your goals and objectives, you could be in for trouble. Before trading on a live account go test your strategies on a demo account and see how you’re doing. If all goes well, you can move to the real deal.
2. Giving in to emotions
The markets shift from one direction to the other multiple times a day. It’s a constant battle between bulls and bears, with prices swinging from one side to another.
The same fight might start inside the mind of the trader in the heat of the moment. If not managed right, all the negative emotions such as greed or fear might take control and lead to unwanted scenarios.
Always keep your cool. Remember, you have a trading plan and stick to what you know best. Don’t try to do more. Routine and habit are good!
3. Ignoring stop-loss orders
Stop-loss orders should be critical tools in your risk management strategy. The significant advantages of using such instruments? They execute themselves automatically once you set up specific targets and save your trading account from being completely wiped out. Stop-loss orders can also help you lock in some potential profits.
You can read more about market orders from one of our previous articles here.
However, seasoned investors advise to always predetermine your risk before starting a transaction. What is the risk/reward ratio? Is it worth it pursuing this trade? Only after you have the answers can you safely establish your stop-loss limits.
4. Abusing leverage and margin
Leverage and margin are dangerous if not handled with the utmost care. Just like ignoring stop-loss orders, they can potentially wreak havoc on your trading account. But what do these two terms mean?
Investing with leverage means taking a loan from your broker to open a position. Essentially, you can open a position bigger than your initial investment. Some brokers offer higher leverage levels, but it's not advised to take in that much debt, especially if you're new to trading.
After you settle on an amount, you need to pay a deposit (the margin). Margin refers to the deficit or the funds you receive to invest in financial instruments. It is the difference between the overall value of the investment and the amount taken from the broker.
Find out more about leverage and margin, plus other key trading account concepts from here!
Why do experts recommend not to abuse leverage and margin?
The worst thing you can do is hunt for free money. If you use excessive margin and your trades don’t go the way you had hoped, you will find yourself in big trouble. The same thing applies to leverage. Don’t even think about biting more than you can chew!
5. Trading everything… all at once!
Diversifying your trading portfolio is one thing, and trading instruments from all asset groups are entirely different. Unfortunately, the latter is a common mistake; many beginners tend to repeat.
Many novice forex traders target random markets, not knowing the proper ways to approach each one of them. Avoid doing such a thing. Randomly trading without a clear fundamental or technical strategy can only lead to trouble.
Instead, focus on what you’re most comfortable with. You fancy trading Forex? Stick to it and learn the best ways of investing in currency pairs along the way! You think commodities are your point of interest? Then start following the latest OPEC meetings, EIA's reports, and gold reports. That doesn't mean you cannot try diversifying your portfolio. It merely means it's better to take it to step by step.
Hopefully, by now, you have learned some of the things you should not do when trading. Put enough time and effort into it, and you might get a fair shot at success. Treat it with superficiality and arrogance, and you will most likely end up empty-handed.
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