Individual traders are susceptible to a series of errors that left unchecked can spell disaster
Let’s analyze some of the most common mistakes traders can make.
1. Always buy low and sell high
Of course, in the optimal scenario the best moments for either entering or exiting a trade can look obvious and clear, especially when viewing charts. However, reality is much more complicated and much more uncertain. What may initially seem like the ideal moment for a reversal at first glance can very often turn out to be a small stop in the midst of the trend.
Therefore, it is best to rely on oscillators (technical indicators) that are helpful to determine enter/exit moments and to estimate the strength of the current price trend. This feature is available on every trading platform.
2. Overconfidence in your trading strategies
Confidence is good – it’s difficult to have success without some and there’s nothing worse than lingering on amid a demoralized state. However, this works both ways and too much confidence that you can do no wrong is a recipe for disaster.
This issue most commonly comes up after lengthy backtesting in which a trader has a certain tried and true strategy using very long historical data. Maybe it has been successful, or you have knocked your trades out of the park but critically viewing your shortcomings or losses is sometimes challenging.
A series of losses at first glance can seem like an aberration or just noise. Do not simply discount this! Consequently, a trader must always keep in mind the fact that the markets can change dramatically and without warning. The economy can enter the next macroeconomic cycle phase, or perhaps policy or other economic conditions could have changed. Strategies should from time to time subjected by a critical review for relevance.
3. Problems with recognizing mistakes
When was the last time you made a mistake? If you cannot answer this question, then there is a problem already! This is often related in part due to ones’ overconfidence in his or her assessments of the situation.
The market always changes, which represents a new important circumstance that could appear, but for novice or introductory trades it seems that they need only a little bit to stay calm and wait while loss disappeared and then there will be a reward.
This is obviously not always the case and thetechnique and forecasts could be relevant, but traders should not use it as scenario for future. Even the largest investment banks and international organizations are changing their expectations and forecasts. There is nothing wrong with altering expectations or forecasts. Even the best in the world cannot predict the future every time and you are no different!
4. Over-reliance on your emotions
Emotions are an integral component of many traders however it’s important to disentangle this from your overall strategy. Big wins and big losses will occur and it’s impossible to shrug these off without any reaction.
Emotions can certainly bring a healthy excitement and a competitive spirit to those who truly love trading and this in and of itself is not an inherent weakness or problem. However, emotions can be a double-edged sword and one’s euphoria with profits and deep sorrow with loses can lull traders into a false sense of security or insecurity.
Instead, it’s best to make your goals for the day and tune your trading strategy respectively. They allow a trader to reduce a level of emotion and minimize the number of spontaneous decisions.
5. Lack of a clear plan
Speak to any successful trader and they have some level of planning that is taking place. The absence of such a strategy can be tied to many issues, most commonly relating to inexperience, overconfidence, or laziness.
That being said even more experienced traders sometimes can often make this same error, justifying the desire to remain flexible in a trade. It is crucial to determine what parameters exist for entering and exiting the trade and follow them as closely as possible.
Deviating from a plan is permissible except in periods of increased market volatility to close the position and reduce trade risks. In the long-run, this tactic is able to bring good results, although at the first glance it may look overcautious.
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