The Top Trading Mistakes that Traders are Prone To


Trading has been particularly lucrative over the last while with markets being so nice and volatile, but trading also accelerates the impact of our mistakes. Here are the biggest ones.

Trading is in a sense investing at a much higher rate of speed. The principles of trading versus investing are actually very similar, at least as far as the principles that we should be following to both trade and invest well, even though few investors aren’t familiar with them. Most traders aren’t either though, and what ends up happening is that they take a lot of the mistakes that investors make and accelerate them to the point of failure.

It’s not hard to imagine how this happens. Anyone who has sought to time their investments will know just how prone they are to making mistakes, ranging from things like choosing the wrong trades, the wrong entry points, selling too early, or hanging on to losers too long, but if you only trade occasionally the impact of this won’t be that great.

If you are trading many times more often, thousands of times more often that is, then your errors will get multiplied by thousands of times. The great majority of traders bust their accounts, and while some go out in a blaze of glory, most die of the affliction of death by a thousand paper cuts, and when you’re touching this much paper, the cumulative effects of these cuts will certainly kill you, and usually sooner rather than later.

Just like with investing, or rather seeking to time your investments in this case, people will often just jump into trading and hit the ground running. Without the proper understanding and direction though, they will often get knocked off their feet pretty easily, and if they are not prepared for this, this will happen no matter how talented they may be.

Make no mistake though, trading is a game of skill, and natural talent goes a long way, but much of what it takes to become a good trader is a learned skill. If we think that we can just start out with this and not put the work into it and expect to not only do well but even survive in this game, we will be in for a real reckoning.

This is a lesson that will be learned eventually anyway, but it’s just better to look to limit the cost of our tuition by having an appropriate amount of respect for the challenge that we have chosen. While becoming a successful trader isn’t an enormous challenge, it is one that we do need to put in enough preparation with, especially before we ever risk any meaningful amount of money with it.

When we are not prepared sufficiently, this leads to the mistake of not trading with a clear and proven strategy. There are some traders who are skilled and experienced enough to trade off the cuff, this takes a long time to master and we otherwise at least need some real structure to our strategy, even though we may choose a discretionary element. That even has to be earned, and the most important thing for traders is to have a clear plan and stick with it.

The biggest challenge here is maintaining our focus on overall probabilities, which is where we get our edge, but we can become very tempted to step away from this and put too much weight on statistically insignificant results. An example of this would be a situation that you know your plan will be right 6 times out of 10, which is a good number, and see it fail a few times in a row and allow this to change our perspective from right to simply wrong.

We may then think that we should have hung on to the trade longer, sell sooner, wait to enter more, or any number of variants that may be suggested by short-term results but are not supported by the real evidence. It does take discipline to execute your trading strategy and not look to change it up in situations where this would be unwarranted.

Counting Your Money While at the Table is Bad in Poker but Much Worse with Trading

Seeing results in terms of money rather than manifestations of probability is another big mistake, and this one can really take us off our game. This can have us sell too soon either to book the money we had and not lose it back, or hang on to trades too long because we are upset about being down too much and we refuse to book the loss. Losses that are booked are real, but the ones that are still live although looking at profit and loss in a trade are just as real, and not getting this is always a mistake and will take us off course.

This brings us to one of the biggest mistakes of all, which is not managing risk properly. This can range from taking too big of a position to not having a good exit plan and seeing ourselves exposed to more risk than we should or even can bear. We always need an exit strategy, when the odds of the trade working turn negative, and sticking around beyond this point simply adds to our losses overall. Some of these bad moves seem to work but when you add them all up, the net result is a lot of pain.

Whenever we place a trade, and for the whole time that we are in it, we need to be thinking of how the evidence that we have for it will work out overall, after hundreds of these particular instances for example. As long as we are shooting for the overall distributions of probability, we have not made a mistake whether a particular trade wins or loses money.

We should not ever be judging the quality of our trades by their results, and although we do need to keep score and need to look at this once in a while, on a day to day basis, we need to judge ourselves solely on how well we put our plan into place. We need to work on the plan as well of course but this should never be done in the heat of battle and also not be done unless we have enough evidence to support the course change that we believe we need.

There are several components to risk management in trading, but at the heart of this is defining our risk in a trade, which we do by planning how far we are prepared to let it go against us and also place a stop loss to get us out automatically when we reach the point where it has failed. It may come back later, but if it doesn’t do in a way that can be properly distinguished and is therefore more subject to chance, this is not gambling and we can never expose ourselves to such randomness, especially given that the odds are against us here.

If we think something will go up over a certain period and it goes down instead, this is not a pattern that will lead to profit if we hold it because the probabilities of this trade have been clarified for us and we need to heed this new guidance. Being stubborn is therefore not a desirable attribute and will cook our goose faster than just about anything else.

We do need to adapt but must do so in a way that is neither too impatient or too patient. This is all about assessing probabilities and as we become more experienced, we will have the opportunity to become better at doing this, but we need to ensure that we are confident enough but not too over confident, careful but not too meek, and find the sweet spot where we realize that the best we can do is seek out and execute promising ideas and many will disappoint.

Good traders also need to be able to seek out the proper amount of patience and confidence when it comes to selecting their positions, where they are neither too eager to take on marginal or bad trades and also not too afraid to go after the actual good opportunities. Some traders can do well being in a trade full time in even a single asset, either long or short, while others find it beneficial to stalk their prey a lot more and leap only at the right time.

Both of these strategies can work but there is a real tendency among traders to be too anxious and too eager to dilute whatever advantage they have with plays that they are actually at a disadvantage with. Until you really know what you are doing and have proven that a given strategy will work, it’s better to err on the side of caution with real money and do your experimenting with either insignificant amounts or with a practice account.

We Should Limit our Losses, not Our Gains

A mistake that not a lot of traders realize is the one where we set profit targets and actually place orders to execute after we reach a certain level of profit. We will often hear people teaching traders to make sure they set their stop losses and they will at the same time encourage them to set similar limits on their profits.

This is a huge mistake because we really don’t know when a move will stop and our real advantage in trading is making our losses smaller while seeking out bigger profits. If we cap this, we’re really capping our success, and while we do need an exit plan on the upside as well, selling into strength is simply a terrible plan.

Successful traders will very often define their success over an entire year to a few blockbuster wins, where they may have actually lost money the rest of the year. In all cases, the extra we gain in our trades that exceed our expectations is going to always represent a significant portion of our overall profits, and cutting this off abruptly will seriously limit our success or even may have us failing at this.

Traders have access to various amounts of leverage, which can make our trading much more exciting by multiplying our gains by the amount of leverage we use, but it also multiplies our losses. What this does in effect is multiply our trading advantage or disadvantage, and the more leverage you have, the more confident you have to be about your actual advantage.

This is not something we want to be learning on the fly, because when the lesson is over, we will be broke. While we should only be trading with funds that we can afford to lose without too much discomfort, just giving this money away faster is never a good idea.

We especially need to be careful with leverage if we are holding during times where the market is closed and are left defenseless to gaps against us. Just one of these can wipe us out and then some when we are leveraged. If we really want to hold overnight, we can and need to dial down the leverage to accommodate this, which is best done by selling off enough of our positions at the close where we’re not excessively exposed, and add to our positions as appropriate when the market opens again.

Intraday traders never hold overnight and just get out near the close and get back in at a suitable later time, to ensure that they live to fight another day. This can allow them to magnify their advantages while still limiting their risk well. There are traders that don’t pay enough attention to this and they might do well for a long time, but that one fateful day may come along and see them lose all of their money and perhaps more, or in lesser circumstances, get stung to the point where it may take a long time to get even again.

The final mistake we’ll discuss here is one that isn’t talked about that much but is nonetheless huge. We always need to strive to get better no matter if we are a new trader without much of a clue or one that has been trading very successfully for decades. We tend to set a cap on our trading education, much like people set take profit targets, and if we get lazy with this, we’re going to really limit ourselves.

This has both a quantitative and qualitative component, as we don’t just want to learn more things, we need to learn the right things. We need to therefore ask the right question, which will always be how we may have traded better. It is no much the quantity of our thinking that helps us, we also need quality. We might have just closed the best trade of our careers, but we need to be asking this question even of these trades. If we don’t ask what the best approach would be, we will never find it.

Trading can be both extremely rewarding and pretty challenging, and we have both the ability to get returns many times larger than investors shoot for and also have losses many times larger as well if we are not wise or careful enough. Trading in itself manages risk considerably better than investing does when done properly, but it also comes fraught with many potential mistakes that can even guarantee we’ll lose everything. By seeking to do our best to avoid these common mistakes, we are at least pointing ourselves in the right direction toward making our trading dreams come true.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

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