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. What are the mistakes new traders make.
He said that successful traders’ real “secret” is not some strategy they know about and the rest do not. Instead, it is that the best traders know what not to do with respect to their trading. New or struggling traders, however, tend to repeat the same mistakes.
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.
It is often hard enough to find one compelling trading opportunity. So when a few show up in unison, it would be easy just to run with them. For example, If there were multiple attractive JPY-based currency pairs to trade, you should focus on one. Even if, for example, JPY or crude oil seems like a “sure thing,” do not risk overexposure to risk by buying or selling multiple yen crosses. Also be careful about buying a range of oil-backed currencies like CAD, AUD, and NZD. That means even if all the technical set-ups are valid according to the rules set forth by your trading strategy, you will simply pick the strongest set-up from the group. This will be based on reward/risk profile or strong technical signals.
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. If the market happens to go against you, losses will be quickly compounded.
So whatever your “standard” is for position size, do not exceed 1-2% position size. For that is the kind of overexposure to risk that can lead to a large drawdown. One that is much harder to recover from than any other. A more modest loss will not stop you from trading.
Why might a trader use excess position size, you wonder? Well, often, it’s based on emotion. 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. Some may 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.
Perhaps one of the most infamous mistakes new traders make is abusing leverage. 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. This occurs 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. 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.
It is probably because trading the news intraday is a “sexy” thing to do. That is why all the talking heads on TV and in the financial press are forever discussing it. Many new traders do not even know is that you do not 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 is little need to wait anxiously for a non-farm payrolls release, or the latest central bank monetary policy meeting minutes to go public. The moments on either side of key news and economic data releases are among the market’s most volatile. These 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.
There is some 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. Remember, everyone makes mistakes, even Warren Buffet!