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Trading in the stock market can be very rewarding, but it’s easy to make mistakes that can trip up even seasoned traders. According to a study, 90% of traders lose money while only 10% of traders make money. So, what do the successful 10% know that the 90% don’t? What are the mistakes that these 90% make and the 10% avoid? In this blog, we are going to share such 10 most common mistakes traders make, based on over two decades of trading experience.
Mistakes in trading can happen when people make poor choices or don’t follow a solid plan while buying or selling stocks. These mistakes can include not managing risks well, not having a clear plan, letting emotions sway decisions, or not keeping up with market changes. Recognizing these mistakes is the first step in avoiding them, which can help you trade better and more successfully.
The consequences of making these trading mistakes can be big. They can hurt your financial results and shake your confidence in your trading strategy. By avoiding these mistakes, you can save money, earn more, and be more consistent in your trading. Success in trading means not only making money but also cutting down on unnecessary losses. Learning to avoid common mistakes leads to smarter and more disciplined trading.
That’s why today in this blog, we are going to share the 10 most common mistakes traders make, which we have analysed over the last two decades of our trading journey.
As legendary investor Warren Buffett says, “An idiot with a plan can beat a genius without a plan.” This highlights the critical importance of having a clear trading strategy. One of the biggest mistake traders make is not having a clear plan. This often leads to making snap decisions based on emotions rather than logic.
It’s really important to have a clear trading system set up. This system should help you figure out when to buy based on certain signs in the market or specific events. It should also guide you on when to sell to either grab some profits or stop losses from getting bigger.
You’ll also want to have a plan for taking some profits early while still hoping the rest of your investment grows. Make sure to adjust your safety nets (stop-loss orders) as your trade starts to pay off. Keeping an eye on the overall mood of the market and having backup plans for different situations are crucial too.
This kind of organised approach helps you stay ready for whatever the market throws at you and cuts down on making hasty decisions based on emotions.
Charlie Munger once said that “there are only three ways a smart person can go broke: liquor, ladies, and leverage.” This simple warning shows the risks of using too much leverage in trading. Leverage lets you control a lot of money with just a small amount of your own, which can mean big profits if the market moves the right way. But the flip side is that it also makes losses much bigger if things go wrong. Even a small drop in the market can mean a big loss for you, sometimes more than what you first put in.
To use leverage safely, make sure you really understand it. Only use as much leverage as you can handle, according to your own risk tolerance and your trading strategy. Using stop-loss orders can help too. These orders automatically close your trade if the market moves too much against you, helping to limit your losses.
It’s also crucial to keep a close eye on your trades, especially since market conditions can change quickly. Being well-informed and ready to act can help you handle the ups and downs of using leverage.
Plus, learning as much as you can about the financial instruments you’re trading will help you make better decisions. By being careful with leverage, you can protect yourself from big losses and keep your trading on track.
Ignoring stop losses is a serious mistake that can turn manageable losses into major financial problems. Stop losses are crucial because they act as a safety net, automatically selling a security when it hits a certain price to prevent further losses.
Stop losses are essential, especially in volatile markets, because they keep potential losses within manageable limits. Without stop losses, you might hope for the market to turn back in your favour, which can lead to significant losses if it continues to move against you.
To set stop losses effectively, you should first decide how much you’re willing to risk on a trade—typically, this might be 1-2% of your total trading capital. It’s important to base your stop loss levels on actual market data and trends, considering factors like historical price movements and volatility. You should also be consistent with applying stop losses across all your trades to manage risk effectively and adjust them as needed based on your current investment size and market conditions.
“If your goal is to trade like a professional and be a consistent winner, then you must start from the premise that the solutions are in your mind and not in the market.” – Mark Douglas, author of Trading in the Zone.
Letting emotions like fear, greed, or excitement dictate your trading decisions can lead to inconsistent outcomes and financial losses.
For example, the fear of missing out may lead you to buy a stock without proper analysis, resulting in losses when the market adjusts.
To combat emotional decision-making, establish clear trading rules as discussed in the first point for entering and exiting trades, and follow them without emotional interference. Keeping a trading journal can also help you recognize emotional patterns and their impact on your trading effectiveness.
By methodically applying these strategies, you ensure that your trading decisions are based on strategy rather than emotion, leading to more consistent results. Additionally, to improve this approach, you can engage in external practices like mindfulness and meditation.
Failing to adapt to market changes is a common pitfall for many traders. Markets are always changing, sometimes quickly, due to new laws, technological advancements, big world events, and other internal or external factors that affect the market. When traders stick too closely to one method without adjusting, they can miss good opportunities and face unnecessary losses.
The ability to adapt is crucial in trading. Markets don’t stay the same, and a strategy that works well one day might not be effective the next. For instance, a trading approach that thrives during economic growth might falter when the economy begins to slow down, leading to significant losses if not adjusted. Similarly, a stock that performs well in peaceful times might plummet during political unrest.
To remain effective, traders need to continually review their trading strategies against current market conditions. This doesn’t mean abandoning a strategy at the first sign of trouble but rather making small adjustments or diversifying investments to better suit the new situation. Keeping up-to-date with market news and being willing to alter your plans can help you stay on top.
This proactive approach enables traders to manage risks more effectively and seize new opportunities as they arise.
Poor risk management is a critical mistake that can undermine even the most promising trading strategies. Good risk management involves understanding and implementing practices that minimise potential losses while maximising the opportunity for gains. It starts with the fundamental rule of not risking too much of your capital on any single trade. Most experienced traders recommend deploying only 2-4% of your total trading capital on a single trade. This limits the impact of any single loss and helps preserve your capital for future opportunities.
Another key aspect of sound risk management is using the right amount of leverage. While leverage can significantly increase your potential profits, it can also amplify your losses. It’s crucial to use leverage wisely and conservatively. Matching your leverage level to your risk tolerance and overall trading strategy can help you avoid large, unexpected downturns that could be devastating.
Also, implementing risk controls like stop losses is essential. Stop losses help you define your exit points before entering a trade, ensuring that you do not hold onto a losing position too long in the hope of a market turnaround. By setting stop losses, you automatically limit your potential losses, making your trading approach more disciplined and structured.
Staying disciplined with these practices allows you to manage and mitigate risks effectively, leading to a more stable and profitable trading career. These three pillars of risk management—capital allocation, careful use of leverage, and strict stop losses—form the backbone of a robust trading strategy.
As Warren Buffett says, “Risk comes from not knowing what you are doing.” Therefore, it’s crucial to establish a solid trading plan and pair it with an effective risk management system. This setup helps you avoid significant trading losses and keeps potential losses under control.
Your system should be designed so that when you win, you win big, and when you lose, you lose small. By maintaining this balance, you can ensure that your gains significantly outweigh your losses over time, leading to sustainable success in trading.
Overtrading occurs when traders execute more trades than their strategy supports, often driven by emotional impulses rather than a planned approach.
Traders might notice they are overtrading if they find themselves constantly buying and selling without a clear reason or if they try to capitalise on every small market move. This behaviour can lead to higher trading costs, increased taxes, and unnecessary stress. Additionally, it can result in lower overall profits as the costs of executing so many trades diminish any gains made. Over time, this excessive trading can lead to fatigue and poor decision-making.
To avoid overtrading, it’s crucial to adhere to a well-defined trading plan that outlines specific conditions for entering and exiting trades. This plan should help maintain disciplined trading within profitable boundaries. Setting limits on how much you trade, such as only allowing a certain number of trades per day or limiting how much money you risk at any time, can also help control the urge to trade excessively.
Another recommendation is to keep a trading journal. You should record every single trade you take, noting the reasons for entering, exiting, and holding, and whether your rules were met before entering the trade. If not, what influenced you to enter? Once you collect enough data, you will notice patterns, and based on these patterns, you can optimise your trading plan.
Skipping research and due diligence is a big mistake that can lead to bad investment choices. Before you buy a stock, it’s important to really look into it. Check the company’s financials—like how much money it’s making and its debts. See how it’s doing compared to other companies in the same industry. Also, look at what’s happening in the market and how it might affect that company.
Good research helps you make informed decisions, reduces your risk, and increases your chances of making a profit. Taking the time to understand these details ensures that your investments are sound and more likely to succeed.
According to research, 90% of traders lose money, while only 10% make money. This significant disparity suggests that the majority may be making similar mistakes, especially when it comes to strategy. One key mistake is following the crowd. Most traders use basic strategies like EMA indicators or chart patterns, which are widely known and accessible. In a zero-sum game like trading, where for every winner there must be a loser, using the same strategies as everyone else often leads to average or below-average results.
At ETTFOS, we’ve been trading for over 20 years and have developed unique systems and strategies that you won’t find on the internet. These proprietary methods give us an edge, but if we shared them publicly, they would become less effective as more traders started using them. That’s why, in our trading programs—where we teach forex, crypto, commodities, and stock trading—we only select a few traders to join and learn these exclusive techniques.
The lesson here is clear: to succeed in trading, you need to have an edge. Relying on the same tools and strategies that the majority uses doesn’t provide that advantage. Therefore, it’s crucial to develop your own approach or learn from those who have already distinguished themselves from the crowd, rather than blindly following common methods. This independent analysis and strategy development is what sets successful traders apart from the 90% who struggle.
Not learning from past mistakes is a critical barrier to becoming a successful trader. Every trader, regardless of experience, makes mistakes, but the key to improvement and eventual success lies in the ability to learn from these setbacks. When traders fail to analyse and understand their mistakes, they are likely to repeat them, leading to a cycle of losses that can be demoralising and financially damaging.
The importance of learning from mistakes cannot be overstated. It provides valuable insights that can refine a trader’s strategy and improve decision-making processes. To effectively learn from mistakes, traders need to maintain a disciplined approach to review. This involves keeping detailed records of all trades, including the strategy used, the outcome, and the market conditions. This record, often kept as a trading journal, becomes a critical tool for reflection.
Reviewing a trading journal regularly allows traders to identify patterns in their trading behaviour that may lead to losses. It helps pinpoint what works and what doesn’t, enabling traders to make informed adjustments to their strategies. For example, if a review reveals repeated losses in certain market conditions, a trader can look to modify their approach during those times or avoid trading in such conditions altogether.
So in this blog, we saw the 10 most common mistakes traders make and how you can avoid them. We hope you learned something from this that will help you improve your trading journey, system, and plans. To succeed in trading, it’s crucial to avoid common pitfalls such as trading without a plan, overleveraging, ignoring stop losses, and blindly following the crowd. These missteps often contribute to why many traders struggle to maintain consistent profitability.
Adopting a disciplined approach to risk management, continuously learning, and maintaining objectivity are essential for navigating the markets effectively. By continuously reviewing and adjusting your strategy based on past trades and market changes, you can enhance your chances for long-term success.
Now below, we are sharing answers to frequently asked questions about trading mistakes-
Every trading plan should include specific entry and exit criteria, risk management rules such as stop losses, and clear goals. It should also detail the amount of capital to be risked on each trade and outline a strategy for choosing investments based on the trader’s research and market analysis. Checkout this blog which explains – How to create trading plan
Safe leverage varies depending on the trader’s risk tolerance and market conditions, but a general rule is not to use leverage that could result in losing more than you can afford. Typically, using no more than 2-3 times your available capital is considered safer and helps manage potential losses more effectively.
Stop losses are critical because they automatically close a losing trade at a predetermined level, preventing further losses. They help maintain discipline in trading by ensuring decisions are executed without emotional interference, protecting the trader’s capital from significant downturns.
To detach emotions from trading, establish and stick to a well-defined trading plan, use tools like automated trading systems to enforce discipline, and keep a trading journal to reflect on your decisions. Regular meditation or mindfulness practices can also help manage emotional responses to the market.
Signs of overtrading include trading significantly more frequently than usual without clear strategic reasons, feeling compelled to always be in a trade, and experiencing increased stress and diminished returns. If your trading costs are consistently eating into your profits, it may also indicate overtrading.
ETTFOS brings over 35 years of trading experience to deliver well-researched, educational content designed to enhance your understanding of the financial markets. Our blog covers key market insights and trading concepts to help you stay informed and sharpen your skills. Follow us for expert updates and in-depth articles.