4 Common Trading Mistakes Beginners Make — And How to Avoid Them
This guide is sponsored by Prime XBT, the leading Bitcoin-based margin trading platform. All links to Prime XBT in this guide are referral links.
Everybody trades to make money, but the sad truth is that most people end up losing money instead.
How do you avoid losing money like most traders?
Don’t do what most traders do!
In this article, we’ll go over some common errors that beginning traders make and how you can avoid making the same mistakes.
1. Trading With Emotions
People are emotional creatures, and many of our daily decisions are made based on emotions. From the clothes you buy to the food you eat to the movies you watch, feelings influence all your decisions.
In fact, one neurologist has found that it was harder for brain-damaged people who had difficulty with emotions to make decisions, simply because they didn’t know how they felt about their choices.
This impact emotions have on our decision-making is why we have traders who rush in to purchase big green candles and immediately sell at a loss when they see big red candles forming.
Our brains tell us to buy low and sell high, but our feelings make us do exactly the opposite.
There are two approaches to solving this issue.
The first is to remove emotions from your trading decisions.
Create a rules-based trading system based on logic and probability, and stick to it. Plan your trades ahead of time, then use limit orders, stop losses, bots, and other trading tools to execute your plans. This way you will never be forced to make a trading decision in the heat of the moment, when your emotions can cloud your judgement.
The second, somewhat counterintuitive way, is to trade with your emotions. Rather than locking your feelings away, use your emotions to inform your trading decisions.
Do you always rush into a trade right before the top? Identify that feeling the next time it happens and use it as an indicator to start booking profits, looking for shorts, or avoid entering a trade.
2. Trading With Money You Can’t Lose
One of the top rules many beginners first learn about trading is not to trade with money you cannot afford to lose.
Then, blinded by greed or impatience, they then mortgage their house or put their life’s savings into a trade and promptly lose it all.
As we established earlier, emotions play a huge part in your decision-making process. The intensity of your emotions can also change based on how much is at risk.
How clearly can you think if losing this trade means you cannot pay next month’s rent, or put food on the table for your family?
How much risk can you handle without getting emotional?
People who trade with funds they cannot lose place unnecessary stress on themselves. They end up making poorer decisions, watching their trades all the time, and entering or exiting trades in the wrong places because their emotions made it impossible to stick to their plan.
Trading with money you cannot afford to lose makes you overly emotional. Emotional trading is irrational trading, and irrational trading is a recipe for liquidation.
3. Setting Unrealistic Expectations
Many beginning traders come into the market thinking they will be rich by the end of the month. These are the people who put too much money into trades, take unnecessary risks, and will most likely end up poor by the end of the week.
Okay then, you think to yourself. I’m not here to get rich quick. I just want something reasonable. I only want to earn $100 a day to cover some expenses. Surely that’s not too much to ask?
While $100 may not seem like a lot, this kind of time-based goal is also a recipe for disaster.
The truth is, the market does not care how much money you want to make, nor does it care when you want to make it. The market will do what it wants to do. Your job as a trader is to consistently put yourself in a position to make money when the market presents you with the opportunity.
If you come to your computer one day and none of the charts make sense, it’s perfectly acceptable to turn everything off and come back the next day. Insisting on trading until you reach an arbitrary number can force you to stay in the market even when conditions are no longer suitable.
4. Failing To Manage Risk
Trading can make you money, but people often forget that it can also lose you money. Every time you place a trade, you put your funds at risk. No matter how good of a trader you are, everybody makes mistakes, and everybody loses money.
One of the keys to successful trading is to manage your risk in such a way that, even when you lose money, your losses are small enough that you can continue trading long enough to get back into profit.
What are some ways you can manage risk?
One way is to always set a stop loss. By forcing yourself to get out of a trade once your idea is invalidated, you set a hard limit on the amount of money you can lose. Otherwise you could risk losing everything, like this trader who lost $20 billion in two days.
Another way to manage your risk is to diversify. Spreading your investments/trades over several different industries and assets reduces the impact that any one poorly performing asset can have on your portfolio.
Diversification also allows you to spot more opportunities and trade where the markets are giving the best opportunities. A forex trader, for example, might occasionally find it more profitable to switch to cryptocurrencies when that market is bullish, and come back to forex once cryptocurrencies are cooling off. On Prime XBT, for example, you can easily trade cryptocurrencies, forex, stock indices, and commodities from the same account, instantly switching to whichever market is providing the best setups.
For cryptocurrency traders, an often overlooked risk factor is that of theft or hacks. If all your funds are inside one exchange and it goes down for whatever reason, you will immediately lose your entire portfolio.
To mitigate this risk, spread your cryptocurrencies over several exchanges and wallets. Use leverage as a tool to allow you to keep less funds on a single exchange while still trading as if you had deposited more.
Conclusion
Some people say trading is like gambling at a casino. They are not wrong.
If you trade like you are at a casino, then it will become gambling. Anybody can blindly buy a stock or coin and hope it goes up, just as easily as they can bet everything on black at a roulette wheel.
However, if you approach the markets calmly, with a well thought-out plan and proper risk management, trading can become one of the best tools for growing your wealth and securing your financial future.
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