Reblog: Avoid These 7 Beginner Trading Mistakes

When you first start trading, the most likely short term outcome bar far is that you will blow up account.And then quit. But it doesn’t have to be this way! If you avoid these simple beginner trading mistakes then I guarantee that you will have a better shot at trading long enough to become consistently profitable.

Ninety percent of traders lose ninety percent of their money in ninety days. Or so we are told. No one really knows if that is true. Avoid these 7 beginner trading mistakes and hopefully you will avoid become a trading casualty statistic!

1. Trading too large

Blowing up your account need not be inevitable. But if you insist on risking five, ten, twenty…even one hundred percent of your account on your first trade, I can almost guarantee you that you will eliminate your trading account long before the ninety days are up.

When you are just starting never risk more than 1% of your total account size on any single trade. You can increase this if appropriate when you are experienced and have a proper position sizing strategy. Until then – 1% or less!

[Nb. If you are a UK spread better and have a smallish account then you may be worried you don’t have enough money to risk maximum 1% per trade. E.g. a trade with a 50 pip stop loss at £1 a pip = £50 risk. So you would need 100×50 = £5000 account minimum.

Don’t worry, I have a solution for you: Trade CFDs. You have the chance to trade micro-lots that can be worth only a few pounds per trade and you only pay tax on your winnings if your combined trading and investment income hits the £11,300 capital gains tax threshold. Win win!]

2. Moving your stop loss and grabbing profit early

Fear and Greed. The twin headed beast that stalks all traders.

These two emotions are the strongest drivers in trading and the biggest root cause of trading mistakes. In particular, psychological trading mistakes are usually the result of one or both of these.

Personally when I first started trading I really struggled with taking my profits before price hit my target. I was terrified of giving back my profit to the market if the price reversed. Or worse, I could end up losing money when I was just in a healthy profit! But this totally messed up my statistical trading Edge. Thankfully I no longer have this problem.

Equally, I am sure many, many people reading this will have experienced the desire to move your stop loss away from a price that is gradually creeping towards it. “Oh it looks like the move is slowing, I am sure I can add in an extra five pips. Er, ok make that ten. Ok fifteen, but that’s it, I promise!” Sure enough you get stopped out anyway but take a much bigger loss than you should have.

There is nothing wrong with moving stop losses or taking profits early when that is part of an advanced position sizing and trade management strategy. But if you are just doing it when Fear and Greed are driving your trading,  then you are totally undermining your trading strategy and will inevitably exacerbate losses and lessen profits in the long run.

3. Trading expert ‘tips’

Twitter traders. Blogging gurus. A talking head on Bloomberg TV. Your mate down the pub. Two blokes on a trading podcast….tips are unavoidable!

But, you have to look at tips as trading ideas, not as decisions that someone else has made for you. Better yet, ignore any trading tips that aren’t already part of your trading strategy!

I am categorically not saying that you should never take the advice of experienced traders. Trading educators get a bad rap, but there are some great ones out there.

If you trade a system or strategy that they have taught you, that you understand and that forms your central trading plan and they provide signals, then that is not a ‘tip’. That is sound advice and mentoring (hopefully).

A tip falls outside your existing strategies and takes the form of:

“Our analysis shows that Gold has a 95% chance of dropping in December!!”

““Mate, just sell JPY, it’s in a safe haven flow, you can’t fail…. Pint?”

“Acme Bank’s analysts believe the EURAUD carry trade could go all the way to 1.4450”

“Acme Anvils Ltd  is going to the moon! Get in now before Joe Public!!”

etc.

Avoid.

4. Trading without an Edge, or at the very least a strategy

I’ve done it. You’ve done it. Warren Buffett has probably even done it. Making a trading or investment decision because it ‘feels right’.

When you have been a consistently profitable trader for 20 years and wipe your backside with £50 notes then I’ll accept your ‘gut instinct’ trading style. Until then, I strongly suggest that when you risk your hard-earned cash in the markets you first formulate some kind of plan of what you you are actually trying to achieve.

You have to trade with a proven Edge or at the very least a strategy. Otherwise you are just giving your money to other traders. Maybe not right away, maybe you will get lucky on this punt. But I firmly believe that if you are trading without a strategy, specific style or mathematically proven Edge then it is just a matter of time until you chuck all your money away.

5. System hopping

Holy Cow! You are one of the few traders who actually has a proven Edge! Bully for you my good Sir / Madam.  You are already leagues ahead of 90%of your fellow traders.

But wait, what’s that, you have had three losing trades in a row and you want to try out a new system that you saw on Twitter? …..derp

System hopping is a perennial favourite in the newbie trading mistake olympics. All trading systems go through periods of losing trades – or ‘drawdown’ – and if you jump to a new system every time you experience one of these periods, you are never going to stick with something long enough to actually master it.

System hopping is probably the main reason why most new traders never get consistently profitable. They may have great risk management and psychology, be great at seeing new Edges in the market, but they end up a trading jack of all trades and master of none.

6. Not recording your trades

I know traders who have compiled vast spreadsheets of back tested trading data for their strategy, but the minute they take that system live and put real money into it, they stop recording their trades.

They figure – well I’ve proven that it works in back testing and it will be pretty obvious if I lose or make money over the next year.

But surely you want to improve? To optimise for more profit? To see if there is a certain type of trade that makes you more money or one that loses you more? How are you going to know if market conditions have improved or worsened or if you have just got better or worse as a trader?

It is absolutely essential to your development as a trader that you keep a trading journal and record your trades. The best trading journal on the market is Edgewonk – I use it every day and thoroughly recommend it.

7. Getting scammed

If you are brand new to trading and have just read the above, there is a chance that you will have thought: “bugger me, this sounds well hard – maybe I should just give my money to that bloke I met on a forum who said he would trade it for me?”

The second best way to lose money in trading (after blowing your whole account on one giant ‘tip’ trade), is getting scammed out of it all by some unscrupulous bastard on the internet. Or giving it all to a binary options company who instantly offshores it to Russia and never calls you again. Or sticking it all on a trading algorithm or EA you bought for 99p that promises 1000% return a year and seeing it run to zero in a day.

etc.

Big big avoid!

Conclusion

Basically, a lot of this is common sense. And while I might write like an arrogant git, what I am actually trying to do is prevent as many people as possible from joining the 90% of losing traders and becoming a casualty statistic.

It is really important to me that you avoid these beginner trading mistakes and survive long enough to become a consistently profitable trader and experience all the satisfaction and financial rewards which that can bring.

Good luck!