We have all been a new trader at some point in our lives or at least considering becoming one. We have seen all of the amazing results that people are getting over the internet (top tip, not all the results that you see posted are real). Trading is becoming more and more accessible to pretty much anyone around the globe. With amounts as little as $1 or $10 being the minimum accepted deposits, this means that pretty much anyone with a computer or access to one can trade.
Due to this, there has been a huge influx of new traders into the trading world, these traders are coming into the industry with an expectation that they will be able to make money, and a lot of it very quickly. This is of course a dangerous mindset, but it is what has been blasted into their minds. Due to this, many come in without the knowledge or experience required to be successful. So today we are going to be looking at some of the pitfalls around that newer traders (and some experienced ones) fall into on a regular basis. If you have been in one, do not fear, there are always ways out of them and ways to improve, if you have not yet started trading, then take them as a warning of what to avoid once you do take the plunge and start your trading career.
Spending More than You Can Afford
One of the main warning signs that you are told by pretty much all of the brokers is that you will probably lose and that you should not be using money that you cannot afford to lose. Many people come in with the hope that they will be able to make a lot of money, the really sad thing is that a lot of these people have been given the wrong information. The countless adverts and social media posts showing off wealth, showing off accounts that have seemingly made from a small deposit of $5. Their desperation has made them want to trade to make money so they have put everything that they have got into it. That is the worst case, there are others who are much better off in life who are also trading more than they have to play with. You should not be trading with anything that you would miss should you use it. Any money that you put in should be considered lost until you withdraw it back to your bank account. If you need the money for rent or food, then do not trade with it, it should be as simple as that, and please, do not borrow money to trade with, that is another course towards disaster, do not put yourself in debt for the hope of making more money.
Lack of Knowledge
When you start anything in life you are starting with it with very little knowledge, you may have heard something here and there or seen how it works, but your actual understanding of how it works is not fully there yet. Yet this does not stop people from getting involved and it does not stop people from starting straight away on a live account. Some may not know that demo accounts are sexist, some may not want to use them, but the real issue comes from those that do not want to learn first. They simply want to start making money without trying to gain the knowledge and experience needed first. There needs to be an element of learning, reading, and practicing before going live. If we tried to play chess with no knowledge of the rules, things wouldn’t go well. The same works for trading and pretty much anything in life, so ensure that you get to know what you are doing and why before you actually try to do it.
Going too Fast
This one leads on from the previous point, some people do gain some knowledge, but then they decide to move a little too fast. Simply knowing something does not mean that you will be good at it and it certainly does not mean that you will be able to be profitable. The old phrase of walk before you can run is certainly relevant here. If you have made a successful trade, that does not mean that everything is perfect, so do not jump straight to larger trades. If you have learned something new such as a new strategy, then do not simply jump straight into the live markets, try a demo account. It is important that you take things slowly, do not jump the gun and get ahead of yourself. Take things one step at a time, learn something new, then one more step, do not try and jump the gun and escalate your trading too quickly.
Getting overconfident is one of the big sins of trading, as soon as you act in a way that is above your current level you will begin to experience losses and the risk management that you have put on your account goes out the window. Overconfidence normally comes from a win or a number of wins in a row, this makes you believe that your own opinion is the best bet and so you follow it. You then begin to increase the trade sizes, the trade frequency, and more just because you think that what you know is more and better than others. This is not the case and overconfidence will only lead to losses. Remember that it is the markets that are in charge and not you.
No Emotional Control
Emotions can get the better of us, they can get the better of anyone, when you first start out you may be starting to experience certain emotions that you have not really experienced before. Things like regret, greed, overconfidence, and doubt are some of the main ones. Each one can have a different effect on your trading and overall profitability. It is important that you get familiar with them, it is also important that you work out ways that you can either avoid or get around them when they pop up, because they will. When you learn to control your emotions you will be able to concentrate once more on the trading and your strategy rather than worrying about the emotions that you are now feeling.
Going Live Straight Away
Demo, demo, demo. Those are important words, yet they are often ignored completely. If you want to be a successful trader then you need to be able to utilise demo accounts properly. When you are starting out with a new strategy, test it for an extended period of time before going live. If you have a working strategy but need to adjust it, then test it on a demo account first. If you need to change your risk management, test it on a demo account first. You should be getting the drift here. Always test everything you do on a demo account before you make changes, if you don’t add you make a change directly onto your live account, then it can lead to losses due to not knowing what effect the changes will have on your strategy.
So those are some of the pitfalls that newer traders seem to fall into the most, there are of course others and these are of course not only for new traders, experienced ones also still manage to fall into these traps. If you have an understanding of them, it will be far easier to work out how you can avoid them in the future to help better your trading.