Trading can create a whole host of feelings, from exhilaration to nervousness, and everything in between. Of course, when you start to win, it’s exciting. But when the pressure starts to build, it can get stressful. At all points in the journey, traders need to remember that as much as the wins may be on the horizon, there’s also the risk of losing it all.
From risking more than you can afford to acting on emotions, it’s easy to slip up – especially when you’re just starting out.
Here are five common mistakes to avoid as you navigate your first few months as a private investor or retail trader.
- Treating trading like gambling
New traders sometimes apply a gambling mindset to the markets – aiming to make quick cash with little strategy and lots of luck.
But effective trading is a skill to be honed over time. It requires discipline, a solid understanding of fundamental and technical analysis and a clear strategy. Treat your trading abilities as a muscle to strengthen through continued training.
- Starting out without practising
Don’t assume that you’ll succeed straight away. Trading takes time to get to grips with. It requires skill and practice to generate real returns.
Fortunately, there are lots of resources available online to help you develop these skills. We recommend practising on the demo version of online trading applications before you risk your money.
- Trading without a plan
To avoid impulsive or emotion-driven decision making, it’s essential to have a plan – including clear objectives, strong analysis, realistic profit and loss forecasts and reasonable time frames.
Take time to create a trading plan that is tailored to your unique trading style, risk tolerance, and financial goals. And remember to review and adjust it regularly to reflect changes in the market and your personal circumstances.
- Ignoring risk management
Many early traders get lost in the glory of their wins and forget to monitor the risks involved in each trade.
Remember to carefully examine your risk exposure and avoid excessive leverage when trading, continually measuring the profit and loss involved in each trade to ensure a potential reward justifies and outweighs the potential risk.
Also consider that many retail traders also like to diversify their trading, as having a range of instruments to trade means they can build portfolios that reflect their risk appetite and hedge against volatility.
Finally, you can mitigate the risk of losses with risk management techniques, for example, by using Guaranteed Stop Loss Orders which ensure your position is always closed at your pre-selected price.
- Letting your emotions take hold
Even once you’ve practised, developed a strategy and carefully analysed the performance of your early trades, it’s easy to let strong emotions such as excitement, fear and hope cloud your judgement, leading to impulsive trading decisions.
Avoid making decisions based on news or market noise; instead, trust your plan and focus on the fundamentals of the market. When pressure mounts and emotions run high, those who remain disciplined will reap the rewards.
Trading is a complex art – and it can take years to master. But by taking a disciplined and informed approach, as well as using a powerful platform, early traders can accelerate their development and improve their chances of success in the market.