Five trading mistakes and how to steer clear of them

Highlights 

• A trader needs to have a set of sharp skills to make it big in trading.
• Position sizing plays an instrumental role in successful trading.
• If a trader can only take care of cutting his losses at the right time, he/she is better off than most of the traders out there.

Trading might come across as an effortless task to some, but the reality is completely opposite. Although, it doesn’t require any certifications/qualifications to pursue trading, however, one needs to have a sharp skillset to make it big in trading. Apart from analytical skills, a trader also needs to have robust risk management skills and psychological resilience to go through tough times.

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Just being able to pick a direction is not enough in this highly competitive arena. Traders have to have a plan for how to capitalise on the forecast or what to do when things go wrong, etc. If you are trying to take your trading to the next level in 2022, here are a few mistakes you must avoid.

1. Trading without a plan

This is one of the most common mistakes traders make. Trading without a plan is akin to going to a battlefield without a strategy. Traders must know about all the scenarios that might play out when their money is on the line.

Think of trading as a business. A business has a well-established plan on how to scale up, when to raise funds, details about the capital structure, etc. Likewise, a trader must know how much money to stake in a trade, what would be the exit levels, how to diversify the portfolio (if it is the case), etc.

2. Going too big

Position sizing plays an instrumental role in successful trading. Many traders make a mistake of making a position so heavy that even a small movement reflects a sizable profit and loss in their trading accounts.

One major problem that occurs with a large bet is that it hampers the decision-making capability of a trader as sometimes losses become too large to exit a position, which eventually snowballs into a catastrophic loss.

3. Over leveraging

Leverage simply means placing a bet of, say $100 but putting in only $50. This leverage is provided by stockbrokers to allow you to trade sufficiently even with inadequate capital. Leverage is not bad; in fact, using leverage efficiently can catalyse your returns.

However, leverage is like a two-sided sword –if not used well, it would take no time to blow up your account. To put it simply, a 50% fall on a 100% leverage is enough to blow your entire capital. Therefore, if you are not skilled enough to use leverage efficiently, it is better to avoid using it.

4. Revenge Trading

Revenge trading is more of a psychological issue. It is a phenomenon wherein a trader starts trading aggressively in order to cope up with previous losses. In his/her quest to get even, the trader starts taking risky bets or starts to go beyond their competence, which almost always doesn’t end well.

To avoid falling into the practice of revenge trading, one must develop patience and a higher psychological resilience towards bearing a losing streak. Meditation, yoga or routine exercises help a lot in keeping your brain calm and poised.

5. Failing to cut losses short

If a trader can take care of losses at the right time, not letting it to snowball into bigger ones, he/she is better off than most of the traders out there. One has to be able to gauge quickly when they are wrong and make a swift exit, especially when doing intraday trading wherein quick decision-making-holds the key to success.

Bottom line:

One cannot avoid losses in trading but keeping them under a permissible limit is almost always in a trader’s hand. Also, small losses are easy to cope up with, as compared to big ones that makes a sizable dent to the trading account.

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