The following are 10 most common but lethal Trading Mistakes, which traders should stay away from at all costs. Anyone of them can literally destroy one's financial dreams and goals!
1. Trading for excitement & thrill not for profits.
Many traders consider stock market as casino and trade for thrill and fun only. As soon as someone has a losing trade, they want to quickly make back the money they lost. They think about the other things they could have done with the money, regret taking the trade and want to recover as quickly as possible. This consequently leads to further mistakes. Be patient and wait for the next high probability opportunity. Don't rush back in.
2. Trading with a high ego.
Many people who have remained highly successful in other business ventures have failed miserably in trading game. This is due to a lethal downfall: a fairly big ego. They fail because they believed that they could not possibly fail. Their egos become their downfall because they cannot except that they would be wrong and refuse to get out of bad trades. Once again, it does not matter who the trader is or where the trader comes from, it does not concern the markets. An individual may have all the charms, skills, number of university degrees/diplomas and all the knowledge of the business world, this does not make them an expert trader.
3. Three 4-letter words that will kill you! HOPE--WISH--FEAR--PRAY
If you ever find yourself doing one or more of the above while in a trade then you are in big trouble! Markets constantly change, they continuously move up and down. Regardless of all the hoping, wishing, praying and fears, a trade that is losing will probably not turn into a winning one. When the trading situation starts to take a turn for the worst, just remember a simple phrase: GET OUT!
4. Trading with money you can't afford to lose.
One of the most paramount obstacles in trading is losing money that you really cannot afford to lose. Many individuals use money which is of utmost importance for their businesses, their families, and their college/university education. Some even take out loans from companies that they cannot afford to pay back. Consequently, as they realise that they have made an extremely risky decision, the individual starts trading out of fear and emotion rather than strategy and logic. If you feel as if you are this person described above, it is highly suggested to stop all trades until you have enough money that you can afford to take risks with in order to avoid enormous financial setbacks.
5. No Trading Plan
A trader must always have a plan. Before you even consider investing money, you must ask yourself the following questions: Do I have a set of rules that tell me what to buy, when to buy and how much to buy, not just for the next trade, but for the next 10 trades? Before I enter a trade, do I know when I will take profits? Do I know when I will get out if I am wrong? All of these questions must be answered in order to form the beginning stages of your trading plan. If you expect success, you must plan ahead.
6. Spending profits before you make them.
It is understandable that an individual will get excited once their trade starts to take off and they get put into a highly profitable position. However, this can also be a major downfall and can cause extreme problems. One rule of trading: do not get too emotionally attached. Once the individual starts going into the euphoric state caused by their success, they start to think how they can double their winnings and make more profit. Problems start when a person gets caught up between their dreams and the reality. Due to their overly optimistic state of mind, the person is not prepared for the market reversals which cause them to lose their profits that they were once so ecstatic about. A trader will fail if they allow their emotions to do the deciding, not their logic.
7. Not Cutting Losses or letting Profits run
One of the most common mistakes made by traders is that they let their losses grow too large. Nobody likes to take a loss, but failing to take a small loss early will often result in being forced to take a large loss later. A great trader is not someone who has never had a loss. Great traders have made many losses. But what makes them great is their ability to recover quickly from a string of losses. Every trader needs to develop a method for getting out of losing trades quickly. Research and learn to apply the best methods for placing protective stoploss orders. The only way to recover from many (small) losing trades is to make sure the winning trades are much larger. After a series of losing trades, it becomes difficult to hold a winning trade because we fear that it will also turn into a loss. Let your profitable trades run. Give them room to move and give them time to move.
8. Not sticking to your plans & changing strategies during market hours
Do not change your strategy during the day while the markets are still open. Keep in mind that while trading, a trader will start to be a subject of emotions such as gear and greed. With rare exception, the most practical thing to do is to plan your trading strategy before the market opens and then strictly stick to it during trading hours.
9. Not knowing how to get out of a losing trade.
A trader must have an escape plan. Itís simple. Remember the simple phrase ĎGET OUTí. Trades can go badly and the market changes on its own accord and does not care what you think. The easiest way to keep a bad trade from going really bad is to determine before you get in, where you will get out.
10. Falling in love with a stock (Just Flirt).
Many traders get fascinated by just a stock or two and look for opportunities to trade in those stocks only ignoring the other profitable trading opportunities. It is because they have simply fallen in love with a stock to trade with. Such tendencies can be morbid when it comes to trading. It may cost any one dearly.