Avoiding The Most Common Mistakes Traders Make
Proprietary Trading of capital markets is a difficult endeavor. Markets can move around haphazardly, and generally move in the direction that causes the most people the greatest pain. It is not easy to generate consistent returns, and it is very important to have a plan and a secure mind set to consistently make money trading. New traders can make simple mistakes as the attempt to trade in the capital markets, but if new traders can avoid these pitfalls they can come through smelling like roses and produce a consistent business that can generates solid returns for decades.
A Traders Though Process
Developing a business plan and becoming comfortable following that plan is one of the keys to creating successful investment returns. There are no short cuts through this process. Investors need to find a strategy that they feel comfortable with where the risks reflect the reward that is generated.
Each individual has unique value systems which helps determine their trading style. For this reason, even the most popular styles of trading will have different results for investors. A proven investing approach can even provide negative returns for some investors as their mindset is different and they cannot approach a specific style in a way that has been successful for other traders.
Finding a trading style that works successfully over the long term is tantamount to generating successful returns. Determining your risk tolerance is very important toward creating a successful trading style.
Each type of style will encounter specific types of risks that an investor will need to accept. For example, a bottom up trading style will likely generate losses initially before the market re-evaluates a security which could eventual lead to gains. Discretionary styles can lead to volatile returns, which an investor will need to accept to benefit from directional trading.
A common mistake made by new traders is avoiding a trading plan and ignoring their risk reward profile. This ratio describes how much should be risked on a trade and the potential reward they will receive if the strategy is successful.
Depending on your style, a trader should determine the amount that will be risked and the reward prior to entering a trade. If this process is done after the trade is executed, a new investor can let their ego get in the way of a trade and fail to exit at a prudent time. New traders often confuse the main goal which is generating returns, with being correct. Nobody is correct all the time, and having a plan to deal with trades that move against you is imperative for a successful investment plan.
Psychological issues affect all investors and it is important to recognize these issues and be aware of these issues as they occur. Denying that you are facing psychological issues when facing a difficult trading environment will only hurt your trading results in the long run. In order to handle problems as they unfold an investor needs to be aware of their mentality, and embrace it in order to create a fix that will generate the correct outcome. Taking responsibility for your actions based on a series of events is the key to handling your psychological trading issues.
Many new traders experience anxiety related to taking a loss. Unfortunately losses are part of trading and investors need to accept this as part of their trading business plan. It would be very unusual to trade a strategy that does not experience losses and avoiding associating this issue from your ego is an important step in creating an important trader mind set.
Another mistake often made by new traders is exiting a position early in an effort to eliminate the pain of losing money. In an effort to eliminate the pain, many traders will stop out of positions early in an effort to eliminate the trade and move on to a new experience. This scenario will play itself out numerous times as it is very difficult to place a trade and have it move into the money immediately.
New traders often make excuses and do not learn from their mistakes. Failure to take responsibility for a trade and understand the reality of a poor market environment often leads to traders putting their head in the sand. Changing risk management on the fly in the effort to hold on to a position will eventually lead to trading failure. New investors will often trade on hope instead of examining their trading as a business.
Trading compulsively and not following a strategy is bound to create failure. You rarely see a technology company start to sell consumer staple products on the fly, but many investors who start as relatively value traders begin day trading when they believe the market is ripe for a move. This type of compulsive trading will likely lead to losses as traders fail to format a risk management profile that is consistent with their compulsive strategy. A proprietary trading training program can help you speed up your learning curve.
Emotional trading is usually never successful. Many investors become angry with the markets and blame price action for the losing trades. Attaching your sense of self to your trading record is destining to generate negative returns. Looking for approval from market action and allowing it to determine your market mind set is an ineffective way to gauge your trading psychology.
Only experience can create a strong trading mindset, and developing a robust trading mentality is just as important as implementing a trading strategy or developing a strong risk management process.