There are good strategies and there are bad strategies, there are smart ways to trade and there is, unfortunately, the not so smart way to trade. When you started out on your trading journey, you were probably told of a few things to avoid, this doesn’t, however, stop everyone, in fact, it is quite commonplace to see people doing things that any experienced trader or anyone with any sort of understanding of risk knows that you should not do.
So we are going to be looking at some of the more silly and certainly more risky ways of trading, they aren’t necessarily attached to a specific strategy, more of a mindset. So let’s look at some of the things that you should definitely try and avoid doing.
Trying to Pick the Tops and Bottoms
If it was possible to warm out where the top of a climb is or the bottom of a dip, then we would all be millionaires, then again, there wouldn’t be as many tops or bottoms around. It is never a good idea to wait until what you think is the top and bottom, the majority of the time you won’t be close. Instead, you need to get into the markets when your strategy tells you to. As soon as you try to guess the tops and bottoms, you will miss your entry, and the trade will no longer be a good one.
If you genuinely feel that it is the top or bottom, it can cause you to put on trades larger than your risk management plan details, this can put your account in danger and this form of overconfidence is never beneficial to an account. So stick to your strategy and don’t try to predict the tops and bottoms of the markets.
Trading Without a Plan
Something that a lot of newer traders do, or those that are simply too lazy to learn or develop their own trading strategies. This is one of the cardinal sins of trading, you need to have a plan, as soon as you trade without one you are on a slippery slope to gambling and ultimately lost accounts. Always have a plan, its best to have your own plan, but if you really can’t make one, at least take one from someone else, while you may not fully understand it and may not be able to adapt it to the changing markets, it will at least give you something to work on and not everything that you do will be complete guesswork.
Adding to Losing Trades
Have you been in a situation where you are in a trade, unfortunately, it has started to go the wrong way? If you have ever traded then you would have, but what is important is what you decided to do next. Did you:
A: Leave it.
B: Close it:
C: Add another position in the hope it turns around.
If you chose C then you made the mistake that we are looking at. If the trade started going the wrong way, it should be closing at your stop loss, adding to the position will just potentially increase your drawdown further, many people who add to positions will continue to add to it, as soon as you start doing that, it will continue to grow at an exponential rate and will eventually blow your account if there is an extended trend (which is more common than you may think.
This is such a dangerous way of trading and is known as either a martingale or grid strategy, it is something that you should be warned off very early into your trading career if you are thinking of doing this, don’t. Reevaluate your plan and work out where you are going wrong instead of just adding more trades to a losing position and hoping for the turnaround that may never actually come.
Guessing or Gambling
A lot of people like a good gamble, but you should stick to sports or the casino, forex, and trading really is not the place that you should be making those bets. If you are only interested in throwing your money at a certain outcome without any regard for anything else going on, then it would be better to avoid trading altogether. Trading is all about working out the probabilities and then seeing which side has the most and so which way the markets are more likely to move. Just randomly choosing a direction without knowing them is the same randomly betting on a football team while not knowing the players. The moral of the story is to simply not gamble, do not trade in this way, it will only lead to losing your account,
Blindly Following Others
If a random person walked up to you on the street and told you that the EURUSD market will move up, are you going to hear that and then suddenly trade it? Probably not, so why would you listen to some random person on the internet? If you blindly follow the suggestion from someone else, then you will literally have no idea why they are telling you to trade that way. What if things go wrong? What are you going to do? You do not know what the decisions behind entering this trade were, so you have no way of knowing how you should adjust it should the markets begin to change.
The other thing you need to think about is the fact that you do not know what the credentials are of the person making the trade. Have they been trading for a long time or is this literally their first week of reading? You have no idea, so it is a really risky thing to follow others without knowing anything about them or the trades that they are making.
Sending Money for Others to Trade
This is such a bad way to trade that it isn’t even classed as actual trading, however, it is something that a lot of people do. You have seen adverts all over the web, people asking for you to invest so they can trade your money, the only advice that there is would be to avoid giving any money to anyone, the moment you do it is lost, are they even real? Do they actually trade? You do not know so do not give your money to the, instead learn to trade yourself and you will at least know what your money is doing and what the strategy behind the trades are.
Increasing Lot Sizes
There are a few different strategies that actually revolve around this such as the martingale strategy, you have most likely heard about it before and have also probably been warned off of it too, and for good reason. As soon as you start to add additional lots sizes and trade sizes to each trade, you are increasing the danger to the account, each trade puts the account in danger and can potentially make you lose it all. Basic risk management will dictate that your trade sizes should not be increasing with every trade, instead, it will keep things steady, if that is good risk management then clearly constantly increasing the lot sizes is not good risk management, so it would be best to avoid this at all costs.
So those are some of the ways that you really should not be trading, if you find yourself doing them, reevaluate what it is that you are doing, step back and start again, you need to work via a strategy and not just trading whatever it is and however you feel, that will only lead to disaster.