Does thinking about your next trade make you sweat? Or does it make you tremble with excitement?
If so, you’re probably focusing on the wrong things. A good trade is simple, straightforward, and boring. You should not be sweating or trembling.
But just because taking a trade is simple doesn’t mean that traders don’t mess them up.
There are certain mistakes that I see again and again when a new trade is put on. The point is that these mistakes are easy to fix.
Your next trade is the next tangible action in your trading career. Always focus on your next trade and make it error-free. Be forward-looking.
Take a look to see if you’re about to make one of these common mistakes for your next trade:
Mistake 1 – You are not in a good physical and mental state
Trading requires focus and you need to be in tiptop condition for your next trade.
Trading when you’re ill or troubled is a bad idea. Emotions seep in easily and you’ll have a high chance of messing up your trade.
Trading is not your typical job. Showing up does not mean getting paid. Showing up might mean losing money, especially if you are not able to trade well.
Do not take your next trade unless you are in a good physical and mental state.
Mistake 2 – You are thinking of your last trade, or your last few trades
If you are dwelling over your last losing trade, it means that you are eager to regain your losses.
When you think of your last three winning trades, you feel like you’re a market wizard and you cannot lose.
Both scenarios cause you to relax your trade criteria and over-leverage. Dwelling over past performance affects your trading behaviour, and always for the worse.
Remember that each trade you take is independent. Do not let the outcome of the last trade affect how you assess the current trading setup.
In a nutshell, stop thinking about your last trade before taking your next.
Mistake 3 – You want to buy a new car with your next trade
Your next trade may or may not buy you a new car. But by wanting your next trade to pay for your next bill or luxury item, you will ruin your trading account.
You will be tempted to base your position size and target on the price of the fancy car. When you do that, you tend to take on too much risk and skew the expectancy profile of your trades. Don’t mess up perfectly good trades for an unrealistic profit target.
Consistent trading produces results over many trades.
When you want to buy a new car with your next trade, you are projecting your desires on the market. But the market does not care about you. This discrepancy is a recipe for disaster.
Mistake 4 – You take the trade out of boredom or fear
Boring trading is the hallmark of stable profitable trading. Excitement belongs to the casino players, not traders.
Have you tried studying the market for an entire session without taking a trade?
You might feel like you’re watching paint dry, but it is the perfect practice for a new trader.
It drills in the importance of patience and inaction. As a trader, you don’t need to be always long or short. Having no position is a position. Many new traders don’t understand this.
Being able to stay out of the market when you don’t have an edge is a valuable trading skill.
Most traders can’t because of fear and boredom. You feel bored sitting around whole day without trading. Or you might be afraid of missing out the next big move.
There is a time to go long. There is a time to go short. And there is a time to go fishing.
Mistake 5 – You forget to calculate expectancy
Expectancy is a core trading concept. No trader should ever put on a trade without understanding this concept.
Nothing is certain in trading. Hence, we can only rely on what we expect from the market. Statistically speaking, we rely on a trade’s expectancy.
Before your next trade, you must estimate your winning probability and reward-to-risk ratio.
Trade Expectancy = (Probability of Win x Reward) – (Probability of Loss x Risk)
If you expect a positive outcome (positive expectancy), take the trade. If you expect a negative outcome (negative expectancy), skip the trade.
The estimates might be fuzzy but this is an essential step. Without aiming for positive expectancy, a trader is just a gambler in disguise.
Mistake 6 – You deviate from your trading plan
Consider a trade that violates your trading plan.
If that trade turns out to be a losing trade, you will beat yourself over it and regret not following your trading rules.
If that trade turns out to be a winner, you cannot take credit for it as you did not follow your trading rules. It’s just pure luck. The success of the trade has nothing to do with you.
Moreover, a rogue trade is not part of your consistent trading records. Hence, it does not help you to improve your trading plan.
In a nutshell, trades that violate your trading plan are not worth taking.
Mistake 7 – You forget to track key news announcements
Even if you do not trade based on news, you must still take note of key announcements.
Entering into a directional trade just before a news announcement is a gamble. You will not know how the market will react to the news.
If you need a tool to help you with this, I highly recommend the calendar at ForexFactory. It is user-friendly, and you sync it to your local timezone.
Mistake 8 – You mess up your stop-loss order
There are many ways to mess up a stop-loss order.
Not putting on a stop-loss. You should always use a stop-loss order.
Widening your stop-loss. Stop-loss orders are meant for limiting risk. It becomes useless when you widen it.
Cancelling your stop-loss. If you cancel your stop-loss, you are violating your original trade plan. It’s a clear sign that you’re trading out of control. You should exit all positions immediately and take a break.
Setting an illogical stop-loss. Never ever set your stop-loss order based on how much you want to lose. The market does not care. Learn how to set a logical stop-loss here.
Mistake 9 – You don’t have a target plan
Do you have a target? You don’t need a specific target for your next trade, but you do need a target plan.
A target plan defines how and when you will exit when the trade goes in your favour.
Many traders fail to plan for a target because of the trading advice “let your profits run”. However, letting your profits run does not mean not having an exit plan when things go well.
If you lack a target plan, you will keep second-guessing yourself even when things are in your favour. You might even end up giving back most of your profits to the market.
If you don’t know how to take profits, how can you be profitable?
Mistake 10 – You average down
Averaging down is not always wrong. It is alright if it makes sense as part of your trading method and you’ve planned to average down.
For instance, you’ve calculated a fair value for a stock. And you bought the stock once its market price is below the fair value you calculated. Let’s say its market price continues to fall while its fair value stays. Then, averaging down is only consistent with your trading strategy.
But, in most cases, averaging down increases risk in a position that has failed to prove itself. Averaging down then becomes a terrible failure of risk management and lack of trade discipline.
Mistake 11 – You risk it all
Simply put, you ignore the most important trading rule – position sizing.
Limiting your risk is half of the trading game. Taking on good risk is the other half.
When you risk it all, you are ignoring the first half of the trading game. You might win for a few trades, but eventually, you will ruin your account.
Don’t risk it all for your next trade.
Mistake 12 – You fail to record the trade
Every trade should be recorded. Every trade you take is a precious learning lesson. Learn equally from winning and losing trades.
Trade recording must be done as soon as possible. This is extremely important for journalling down your emotions and discipline issues. These issues tend to fade away in your mind if you do not note them down immediately.
Develop your own method of recording each trade. The rule of thumb is to have enough details to reconstruct the trade. This includes your reasons for taking it and your emotions during the trading process.
Mistake 13 – You over-analyse the trade
You should learn from every trade, but do not over-analyse your next trade. It is just but one trade.
From a single trade, you can only learn two things.
- Have you followed your trading rules?
- Have you kept your emotions under control?
For learning points beyond that, you must analyse a set of trades. From a set of trades, you can infer the times of the day when your strategy works the best. You can also work out if your price action analysis is on the right track.
Don’t over-analyse a losing trade. That is usually the first step to the never-ending search of the Holy Grail.
Take Your Next Trade Free Of Mistakes
These common mistakes have nothing to do with your trading edge. You will still need a true trading edge to be profitable. Hence, even if you avoid these mistakes, you might not become a consistently profitable trader.
However, if you manage to avoid these mistakes, you definitely will be ahead of most traders. And in this competitive field, it’s an advantage you need to succeed.