These eight trading errors are the most common blunders, so you won’t find them in a solid profit-taking playbook. Knowing the most common pitfalls to avoid will help you tighten your trading plan much more effectively.
Risky risk management
This is first cardinal rule for a reason. Yes, the stock market is inherently all about taking risks, but if you don’t know how much you’re willing to risk and stick to your risk limits, you could throw everything away. The more detailed your risk management strategy is, the better off you’ll be. This means defining how much you are willing to lose per trade and per day. Expert traders largely agree that a sensible rule is to limit yourself to 1% risk per trade only.
Failing to plan
Nothing great in life is achieved without the two Ps: practice and planning. Not only will you not achieve wins, but it is downright impossible to do so without a plan that includes your strategies for trading and managing risks and profits. How much time will you spend reaching a trading goal? When will you close positions? Which trades will you leave alone? These are the fundamentals you must know first.
Not stopping losses
When it comes to planning, a basic protective mechanism such as a stop loss is essential. It is important to use one in any kind of trading, and it is imperative when you learn to trade CFDs and the forex market. Throughout trading history, turbulent events that have triggered crashes have taken everyone by surprise. While the big crashes are well documented, mini ones that happen in intra-day trading are not, so it is best to protect yourself at all times.
Overly confident trade pursuit
This is also known as not exiting a position when you should, or adding to an unprofitable trade. Don’t, for example, increase your stop loss in an unprofitable trade so that you do not close it with a loss. Stick to your original guns – a misplaced belief that things will turn around is the basis of classic stock market loss-making nightmares.
Being ignorant of the news
One of the most basic but critical trading tips or piece of CFD advice is to pay attention to the news. You cannot trade in a bubble because any news – and not just economic indicators – can have a huge effect on prices. The forex market in particular is sensitive to data updates. When economic indicators differ from forecast levels, currency pairs become volatile.
Not educating yourself
Closely aligned to ignoring news is failing to educate yourself. Take the time to sign up for expert podcasts, webinars and email updates on market analysis and more, whether it is from your own broker or your favorite trader.
Using subsequent trades to erase previous losses
Tempting as it might be, you cannot avenge a trade loss with a big trade that you anticipate will make you two to three times the profit. Vengeance brings emotion into your decision-making, which means that cool rationality – such as the qualities that make for good automated trading – has long left your dashboard. Any such lapse in well-reasoned trades is a recipe for reckless trading and the consequences that come with this.
Not exercising caution with correlated pairs
If you see a similar trade set up in multiple pairs, it is likely that they are correlated. It may be tempting to try to take multiple day trades, but quite a few of them do not factor in currency correlations. This means that not only can you make a profit from all of these trades at the same time, but you can also lose on all of them at the same time.
Turn these eight mistakes to avoid into golden rules for what you should be doing, and you’ll increase your chances of steadily landing more wins than losses from the get-go.