I’m forever getting asked this same question: “What is it that separates consistently profitable traders from the rest?” And while I tend to reinforce the idea of learning one, proven trading strategy and becoming supremely committed to it, I heard a fellow trader say something else one time, and thought it was quite interesting as well.
He said that successful traders’ real “secret” isn’t some strategy or trading tool that they know about and the rest don’t. Instead, it’s that the best traders know what not to do with respect to their trading, and as you’d expect, they never do it.
New or struggling traders, however, tend to repeat the same mistakes, and while the mistakes new traders make will vary, every one of them will lead to the same thing: The trader becoming overexposed to risk—sometimes even unlimited risk, which is how trading accounts and entire careers get ruined.
What follows are five of the more common mistakes new traders make over and over again, but before we even start, here’s the good news about learning this stuff: If you tend to commit these mistakes yourself, then learning to stop now will help you take an important stride in your trading career.
Overexposure to One Asset or Currency
Think about it: It’s often hard enough to find one compelling trading opportunity, so when a few show up in unison, it’d be easy just to run with them, wouldn’t it? We even noted the possibility for that in the current environment, as a number of short set-ups in JPY-based pairs were profiled in this past week’s Market Insider Webinar (login required). For example, there was GBPJPY, EURJPY, and SGDJPY, just for starters, but to avoid becoming overexposed to the Japanese yen (JPY), we obviously would never trade more than one of those pairs at the same time…would you?
Even if, for example, JPY or crude oil seems like a “sure thing,” don’t risk overexposure to risk by buying or selling multiple yen crosses, or a range of oil-backed currencies like CAD, AUD, and NZD. No exceptions, either! That means even if all the technical set-ups are valid according to the rules set forth by your trading strategy, you’ll simply pick the strongest set-up from the group based on, say, reward/risk profile, or technical strength, and then look for other valid set-ups outside the asset(s) in question.
Trading Excess Position Size
Yet another way that new traders subject themselves to excessive risk is simply by trading too much size. Essentially, if ever you exceed what’s widely considered the “standard”, 1-2% position size, it’s a lot like having two or more positions in the same asset or currency. And, if the market happens to go against you, losses will be quickly compounded.
So whatever your “standard” is for position size—and hopefully, it’s between 1 and 2% of total account value—don’t exceed that no matter what the circumstances. For that’s the kind of overexposure to risk that can lead to a large drawdown, and one that’s much harder to recover from than any other, more modest loss that would be deemed normal and acceptable by your strategy.
When Emotions from One Trade Impact the Next One
Why might a trader use excess position size, you wonder? Well, often, it’s based on emotion, like anger over the previous trade not going their way, and feeling a need to “make up for it” with the next one. Or maybe it’s greed due to a recent “hot streak” in the markets that has them feeling a bit invincible. Maybe they just feel a heightened sense of confidence about the trade or think they understand the market conditions a bit better than usual this time.
Regardless, you can see that emotion, and not the guidelines set forth by their trading strategy, is what powers the decision to trade excess size. And here, you have one of the most common (and costly) mistakes new traders make week in and week out. So if ever you wonder what separates successful traders from unsuccessful ones, well, this is one of those things!
Misuse of Leverage (i.e. Trading on Margin)
Perhaps one of the most infamous mistakes new traders make is abusing leverage, and this is a mistake so serious that it can be the last one traders make before their career ends! Using leverage, or trading on margin, is a common practice that enables traders to increase their purchasing power and trade larger sums while still only using small amounts of their own capital. The rest, they borrow from the broker, but often unbeknownst to them, trading on margin quickly and exponentially amplifies the risk, as many thousands of Swiss franc (CHF) traders learned for themselves in early 2015.
See related: Why Trading on Margin Can Wreck Your Career
The forex industry as a whole has taken positive strides to limit margin trades, but in parts of Europe, traders can still access leverage as high as 200-1, and while it should go without saying, that’s legal gambling, not trading or investing. So if you don’t fully understand the concept of leverage, or are still trying to develop as a new or aspiring trader, then in your own best interests, avoid using it.
Trading Volatile News & Economic Data Releases
It’s probably because trading the news intraday is a “sexy” thing to do, and that’s why all the talking heads on TV and in the financial press are forever discussing it, but what many new traders don’t even know is that you don’t have to trade volatile news and economic data releases to make money in the markets! In fact, a safer way might be to trade end of day once the emotional reaction to the news has subsided, and more “normal,” trend-based price action ensues.
Especially for longer-term traders, there’s little need to wait anxiously for a non-farm payrolls release, or the latest central bank meeting minutes to go public. The moments on either side of key news and economic data releases are among the market’s most volatile, and cause retail traders to go head to head with big banks and institutional traders. So to be safer and smarter about trading the news, perhaps try waiting until end of day to capitalise on smoother price action and considerably easier entries.
These, of course, are only five of the more common mistakes new traders make, so there are perhaps countless others. If you happen to be struggling yourself and would like some guidance, including regular market analysis and trade ideas, simply become a Lazy Trader subscriber using the link below. Your no-risk trial entitles you to continuing education and even one-on-one mentoring to stop bad habits and get your trading on the right track now and at all points in the future!
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