Often the psychological aspect of a trade is overlooked.Understanding the psychology of trading goes a long way than learning the trading techniques itself.
The techniques of trading are simple.But why then everyone out there are successful traders who all learn the techniques?
The answer is simple.It is more than just learning the techniques.It requires trading psychology and avoiding the mistakes.One big mistake at the beginning can demotivate you to the level that you might give up trading itself.
Some of the most common mistakes traders of every level make are given below:
1. Letting losing trades to run:
One of worst mistakes every beginner trader make is they let their losing trades to run.They do not put stop losses at valid levels.Even if they put their stop losses previously at some point, they tend to change it, when the trade goes against them.They do not like losing money.But every trader should understand this, losing money is part of this business.If a trade goes against the trader, they need to close the trade at a substantial loss.They cannot afford to loose a lot of money in the hope of a trade reversing and going in their direction.
2. Profitable trades are cut short:
Most successful traders on wall street follow one formula ‘Cut your losses short,let profits run on’.The traders who are very successful are found to have a number of losing trades than winning ones.Then how they manage to remain Profitable?The answer is they let their successful trades to run on.They do not book the profit early.Their one successful trade makes enough money to compensate their substantial losses and still there is a lot more money left.
3. Getting egoistic about a position:
Tom Baldwin says:
The Best traders have no ego.You have to swallow your pride and get out of the losses.
If a trader gets egoistic about his position,then he will not be able to cut short his losses.In spite of the fact that how many times the trader have been right or how great analyst the trader may be, he cannot be right 100% always.The market is supreme.The trader’s only target should be to make money from the market, not to prove himself/herself right or wrong.
4. Taking only long position
Some traders are too biased.They only take long positions.They believe that they can either be bull or bear.But the fact is that a trader should always keep their mind open.Either way, they should take profits from the market.They should take long as well short positions in the market.Short selling requires more specialization.You can read my short selling guide below.
Read: Short Selling Guide
5. Going ‘all in’ or taking heavy leverage
Successful traders know how to manage money.Taking heavy leverage or betting all the money on a single trade is dangerous.A trader can easily blow up his account if he is not conscious about money management.Money management is an important skill for a trader.It should be learned first.There will be no difference between a person trading stocks or a gambler gambling in a casino if the former doesn’t know money management.For a small account,only 10% of the money should be used for a single trade.For bigger accounts, this percentage will be even lesser.This will ensure that the account doesn’t blow up.
6. Trying to make up for a loss
Traders sometimes get emotionally involved and try to get back what they lost.This kind of revenge taking attitude does not work in the market.Suppose a trader lost 500 bucks.For recovering those 500 bucks the trader trades again.This type of revenge trading is fatal.In the second revenge trade, chances are that the trader will end up losing more money than he lost the first time.
Trading more than the required number of times ends up in losses.Traders must make a written rule that they will not trade more than 2 to 3 times a day.They should strictly follow this rule. Experienced traders learn the hard way that over trading takes away the good amount of money made and ends up in losses.
8. Averaging a losing position
An investor can take the opportunity of the drop in the price of stocks by averaging the price of the stocks by buying more.Whereas a trader should never average his losing position, if it is not pre-planned.Some pre-planned trades do require averaging the price.But if it is not pre-planned by the trader, a losing position should never be averaged.Averaging a losing position leads to more amount of losses in a trade.So never average a losing position, instead take the loss as minimum as possible.
9. Trying to trade in too many markets
A successful trader looks at every nook and cranny of a segment in which he trades.The trader gains knowledge about everything he requires to know in order to trade in that segment.Whereas a newbie trader tries to trade in many segments and this leads to incomplete knowledge .This incomplete knowledge leads to losses.Although technical analysis applies to all the segments, but gaining other knowledge about a particular segment is mandatory before trading.So trading in a particular segment is better.This gives an edge to the trader.Getting an edge over others is very much required in order to trade successfully.
10. Losing cool
A successful trader never loses his cool over a losing trade.He does not get emotionally involved with his money.He always keeps his emotions in check.He does not trade based on emotions such as revenge or anger.He always tries to stay detached from his trade results and acts independently.He does what he require to do in any adverse situation.
Trading is one of the lucrative professions in the world.In fact, you will never find a successful trader who is not a millionaire.But this job has its own set of difficulties.Being a successful trader require a lot of discipline and fighting back before emerging as invincible.