How to avoid making trading mistakes
There is no denying that online trading is complicated, and it can take many hours before you begin to feel confident in your work. With so much information to take in, getting started in online trading can be a daunting task. So, what are some of the common mistakes rookie online traders find themselves making? And, more importantly, how can you avoid making them?
Going it alone
When thinking of online traders, the first image that might pop into our head is the solitary trader, sitting in front of a wall of computer monitors, setting trades in total isolation. For most traders, however, that image couldn’t be further from the truth. Although much of your time as a trader will be spent alone, that is not to say you will be trading in complete isolation. Online trading these days is an incredibly social affair, with groups of traders meeting across various social networks as a way of both networking and, most importantly, learning from each other.
A way of avoiding trading in isolation is to use one of the many managed accounts available to provide you with the direction your trading skills require to increase your expertise.
Managed trading accounts will provide you with guidance and direction to help your trading skills develop. One of the most important things a successful trader can have in his or her arsenal is experience. If you are a new trader just getting started, however, this is precisely what you have yet to acquire. Using a managed trading account, particularly where you have access to a mentor or group of traders will help make up for your lack of experience.
Not doing your research
The majority of trading guides are aimed at beginners and intermediate traders. They tend to focus on how you go about actually making trades and implementing whatever trading strategy you have chosen. However, there is another side to online trading that is arguably far more important.
To increase your chances of trading success, in-depth research is essential. And although you might be able to get by on pure luck and gut instinct for a while, in the long term, it is not an effective way to trade.
It is essential that before you open a position, you understand the underlying dynamics of the market you are looking to enter. What type of market is it? What instrument are you looking to trade? Are there any news stories or events you need to know about? How has this market performed over the last few weeks or months?
Those are the sorts of questions you need to ask yourself before placing a trade or formulating a trading strategy. And the only way you will be able to answer them is by researching the markets. Doing some basic market research before committing to a trading position will give you a better sense of the market you are entering, which will, hopefully, help you to lessen your risk exposure in the long run.
Not knowing when to cut your losses
By far, the most common mistake made by traders of all skill and experience levels is not knowing when to cut their losses. As any experienced trader will tell you — even the most successful ones —you inevitably will, at some point in your trading career, experience the feeling of the markets turning against you and seeing your carefully planned trades taking a nosedive into the red. One of the most common responses to this is to try and adjust your strategy as a way of balancing out and counteracting the losses. Unfortunately, that often has the impact of compounding your losses, leaving you even further in the red. This reactionary spiral is known amongst traders as “chasing your losses” and is one of the most common problems traders of all skill levels will face when responding to losses.
To combat this, you will firstly need to try and contain your emotional responses to any losses you might suffer. That will allow you to gain some emotional distance from the trade and to think more clearly about your next move. The second step is to utilize stop loss and limit orders in your trading strategy, which will help you to avoid suffering any further losses. These will pre-empt any emotional reactions you might have to the trade and will help you avoid getting trapped in a cycle of chasing your losses.