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Common Errors in Trading

Trading behaviour has a lot to do with human psychology. To save you the money and disappointment, we’ve listed the common mistakes that most beginners (and even experienced traders) commit.

Common Errors in Trading

1. Impatience

Signs:

  • When you expect to gain quickly in your trade without much effort.
  • When despite using all fundamental and technical analysis in your trade, the pattern reverses.
  • When you become fickle minded with your trades.

Effects:

  • It will lead you to a lack of clear vision.
  • It may blow up your account.
  • You may feel discouraged to trade.

Possible Solutions:

  • Step back and re-evaluate your expectations.
    • Ask yourself if your expectations are realistic.
    • Also ask yourself long-term financial goals.
  • Estimate how long it will take to double your money given a particular percentage of return over time (Rule of 72).
    • Eg. Divide your expected return by 72 and you get the time it takes to achieve this.
  • Build your confidence through demo accounts.
    • Before going into your Live Account, give yourself at least a month trading a demo account.
    • Test your trading plan in your demo account.
    • Do not panic while trading.

2. Lack of Clear Vision

Signs:

  • If your trading strategy does not work, you tend to be impulsive.
  • When you think that your trading plan is the only viable plan without considering other factors.

Effects:

  • You will not be focused while trading.
  • Lose confidence in your trades.
  • You will not effectively implement your trading plan.

Possible Solutions:

  • Give your trading plan some time.
  • Estimate how long it will take to double your money given a particular percentage of returns over time (Rule of 72).
  • Trade with a demo account first and if your trades are constantly yielding profits, then start trading a live account.

3. Sleep Deprivation

Signs:

  • When you opt to trade after work hours, compromising your sleeping pattern since the forex market is open 24 hours a day.
  • Since forex trading is highly volatile during the opening and closing of the different stock markets, some traders who live in a different country would have to match their trading hours, even if it means sleeping later or shorter than usual.
  • When you compromise your daily activities including sleep just to trade.

Effects:

  • High level of fatigue.
  • Lack of concentration in your trades.
  • Anxiety that will lead to impulsive trading.

Possible Solutions:

  • Analyze your schedule.
  • If you trade based on your free time, then it is best to trade for the long term by setting your pending orders.
  • Develop a strategy that best suits your lifestyle and not the other way around.

4. Overtrading

Signs:

  • When you are not paying attention to the spread and are unaware that each trade you do generates spread revenue for the broker, eroding your net profit.
  • If you convince yourself that the spread is an irrelevant cost of trading, when in fact it is a significant part of your transactions.
  • Be careful of systems that promote excessive trading.

Effects:

  • You become complacent with your trades.
  • Brokers will take advantage of you.
  • You will not achieve your desired profit.

Possible Solutions:

  • Be careful with systems that promote excessive trading.
  • Be mindful of the spread payment, tax, commission and slippage because it will erode your profit.
  • If you continue to get re-quotes or slippage from your broker, consider changing your broker.

5. Overreliance on outside sources

Signs:

  • As a result of a situation when your trading plan fails, you seek outside sources to help you.
  • When you are the type who can easily be persuaded by other people with regards to trading.
  • When you compromise your trading plan just to listen to other people’s advice.

Effects:

  • Loss of Confidence.
  • Increased confusion.
  • Make a trade that you will regret.

Possible Solutions:

  • Success comes with diligent research, patience and practice.
  • When you ask for advice, don’t ask for tips, but ask for advice on skills.
  • Ask them how they have come to that conclusion and draw out your own interpretation.

6. Superficial Research

Signs:

  • There are many various factors that influence the currency such as economic data, trend lines, technical indicators, price movement, gold indices, interest rates, etc.
  • If certain indicators contradict each other.

Effects:

  • Confusion in your trades.
  • May lead to information overload.
  • Losing patience in the indicators.

What to do:

  • Sift through the most important indicators first and then compare it with the trend lines. Use technical indicators as a means to confirm and not a decisive point.
  • Technical indicators are usually delayed. So it is best to wait for a confirmation before drawing your own conclusion.
  • Do not over-analyze the indicators.

7. Over Leveraging

Signs:

  • There is a misconception with “real leverage” and “account leverage”.
  • Real leverage refers to the actual leverage relative to your account size.
  • Account leverage is what the broker gives you to trade with.