What unites 95% of beginner traders
In this article I’d like to summarize the key mistakes beginner traders make when trading in the financial markets.
The most common mistakes of novice traders may be the following:
- ignoring risk and money management rules;
- application of the “must” imperative regarding the market direction;
- not having a trading plan;
- inability to follow the trading plan, even if a trader has it;
- lack of introspection, systematic recurrence of the same mistakes;
- trading real money without backtesting a strategy on historical data over a long period of time.
The foremost among them is ignoring risk and money management rules. Such mistakes are associated with attempts to find the ideal trading strategy that will generate signals to enter or exit the market with almost 100% accuracy.
Such trading strategy is often called the “Grail”. It doesn’t exist, nevertheless, beginners tend to spend months, and sometimes years, searching for this ideal strategy. In trading every approach has its pros and cons. Regardless of what strategy you use, the most important thing is following risk and money management rules.
The greatest difficulty in trading is the ability to act according to these well-known principles, risk management and money management. Emotions of a crowd trading in the financial markets don’t change and often the biggest enemy of the trading account of any trader is the trader himself.
Don’t expect the market to move “necessarily” in a certain direction. This psychological pattern deprives a trader of required flexibility in decision-making. There is a saying: “The market is always right.” And the market is really always right, since the market condition, price and volume you can see on the chart right now is a movement that occurs due to a change in the balance of supply and demand. This is a direct result of large professionals’ actions, and a consequence of the market participants’ reaction to different things that are already priced in.
You shouldn’t try to guess where the market is likely to move, but move along with the market. You should respond to the signals formed in the financial markets, without trying to guess where the market “has to move”. Moreover, there’s no need to persist, believing that the market “must” move in any direction. Think nimble and remember that people who “know” where the market “has to move” aren’t traders, they just like to speak about markets. For this reason, attention to financial news and different opinions about financial markets often results in defocusing and loss of funds among beginners.
This is the key difference between trading as a business and gambling. A good trader doesn’t need to rely on luck since his efficiency is determined not by one trade or even by a month in trading. A good trading strategy is capable of withstanding the test of time and a large number of trades carried out regardless of luck. Eventually, there comes a time when a significant number of losing trades can appear on your account. If you don’t have skills in risk management and money management, then you will likely start trading more actively and increase your level of risk that will lead to bankruptcy and disappointment.
The ability to follow a trading strategy or avoid trading, when there’s a chance you can make emotional trades (for example, during periods of heightened stress related to life circumstances), is a skill. It’s typical for professional traders, representing no more than 5% of those who start this type of business.
In addition, most beginner traders don’t follow a trading plan. A trading plan is usually used in trading and can be modified to allow you reach your goals and realize vision of the role of trading in your life.
Traders who are constantly blowing up their accounts, don’t analyze their mistakes. This is also a great challenge typical for beginners. Moreover, most novice traders don’t test the effectiveness of their trading strategy on historical data.
Each trading concept that determines the principles of entering and exiting the market must be meticulously tested on historical data. You should evaluate profit potential, possible drawdowns, the average period of drawdowns and the number of losing trades that can appear in such periods. Based on this, it’ll be possible to determine the optimal risk per trade, to build a trading plan consistent with your goals. At the same time, this trading plan is preferably to be objective and based on testing on historical data over a long period of time with different market conditions.
Before using any strategy, always test it on historical data. Even if it proves to be worthy on historical data, trade first on a demo account. Only after that you can gently continue with trading real money, and only after making sure that this trading strategy will allow you to achieve your goals.
If you just start trading in the financial markets and something goes wrong, don’t despair! However, be ready to work on yourself and your trading system. Because right now – at the very beginning of the road – it’s the easiest way to change your trading principles and acquire true trading habits that will be your assistant, not enemies.
Analyze your trading. Do you have any mistakes similar to those described in this article? If so, then it’s time to adjust your approach to the market, work on your trading strategy, turn the weaknesses of your approach into strengths. And that’s when you’ll have a chance to find yourself among 5% of those who succeed in trading.
The next article based on the materials of the “Trading. Successful start” course focuses on trading styles in trading.
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