On the surface, trading sounds like an easy way to make money. After all, markets can only go up, down or sideways, so how difficult can it be? For many people new to trading, it sounds like the perfect lifestyle, and many see it as an attractive alternative to the usual 9 to 5 grind. Then, all you have to do is pick a couple of markets to follow, do a bit of research, but if you think it’s going up, and sell when it starts going down. How hard can it be?
That is, of course, a gross oversimplification of a process that can be quite complicated and that’s before considering the emotional side to trading. If you approach trading in the wrong way, you could end up worse off than before you started.
For anyone new to financial trading who’s thinking of trying their hand at it, here are four of the most common mistakes you should avoid.
1. Diving straight in without thorough education
We get it: you just want to get stuck in. That’s the fun part, after all. But ploughing in without proper planning could see you slide into financial difficulty very quickly indeed…
Before you jump in and start risking your own hard-earned money, it’s crucial that you give yourself the best chance of succeeding. That’s why it’s so important to research different ways to trade. You need to work out which markets could be right for you to trade,, and what tools you need to help you work out significant trading levels. Without this, you’re more likely to take risks that you don’t fully understand, and ultimately end up out of pocket.
Knowing where to begin this research can be a minefield in itself, especially with the deluge of information out there. Fortunately, the trading experts at Trade Nation have a series of trading guides for beginners that explain the different markets you could trade in, and how best to approach them as a beginner. This will help you get your trading off to a good start.
2. Trading without a plan
The old adage “fail to plan, plan to fail” couldn’t be more true when it comes to trading. We’re all shaped by our own unique perceptions of the world and we also have to deal with our emotions. These can be heightened when risking money, so it’s vital to keep these perceptions and emotions under control . A trading plan can help keep you on the straight and narrow. At the very least, you should plan what markets you’ll be investing in, how much you are prepared to risk, as well as the most favourable entry and exit points for your trades.
Once you’ve made your plan, stick to it. Remember: you made your plan before pulling the trigger and putting your money at risk. Once you’re in the trade, emotions can take over and it may be tempting to ditch your plan all together. Fight that impulse, and stick with your original risk parameters. After all, if your trade doesn’t work out straight away, , it’s all too easy to rethink your strategy and start tinkering. However, traders do well to remember that a day’s bad performance doesn’t mean your plan is bad.
It’s often useful to keep a trading diary to record performance. That way, it’ll be easier for you to assess what’s working, what’s not, and where you might need to make changes.
3. Blindly copying what another trader does
If you’re new to trading, it’s tempting to think you can save time and be successful by piggybacking off someone else’s hard work and decisions. The problem with copy trading, however, is twofold: what might be good for one trader might not be good for you, and if their decisions lead to losses then ultimately you will lose, too.
Just look at this example of Derrick Clark, who copied what he thought was a robust trader – until it all went terribly wrong. “It’s just not realistic to think that anyone can accurately predict any market the vast majority of the time,” Clark said. “In my experience, every trader with a lot of followers will eventually crash and burn.”
What’s more, as your teachers probably used to say, copying someone else means you’re denied your chance to learn. If you’re new to trading, make sure you learn and understand the basics of risk management. This is the best way to ensure your future trading efforts work out as good as possible for you.
4. Letting emotions impair decision making
Emotional trading isn’t smart trading, so it’s important to keep your emotions in check to minimise bad decision-making. It’s very easy to act hastily in the face of adversity or loss and, often, such behaviour clouds your judgement. On the flip side, a day’s good performance could mean you make over-confident decisions that deviate from your original trading plan.
So, how do you leave your emotions at the door when it comes to trading? The key is to base your decisions on data. Only enter or exit a trade based on solid technical analysis, backed up with an understanding of the fundamentals. If you let facts rather than feelings triumph over your trading tendencies, you’ll be much more likely to triumph too.