In the past ten years, the global economy has experienced a recovery after the 2008/9 financial crisis. During this recovery, many participants in the financial market have seen profitable returns. In fact, major stock indices like the Dow and S&P have gained by more than 100%. At the same time, the demand for forex and CFD trading has been on the rise. However, statistics have continued to show that most people who start trading in the financial market fail. A recent report by European Securities Markets Authority (ESMA) said that more than 80% of the traders fail. This article will explain the seven mistakes of trading and how to avoid them.
1. Not being prepared
One of the biggest mistakes that many new traders make is not being prepared. As with all careers, people who succeed the most are usually those who spend their time to prepare. For example, without education, it would be impossible to become a qualified doctor. Similarly, in trading, many people fail simply because they are not prepared. Often, they will see an ad, create an account, and start trading. To avoid this sin, you need to embrace preparedness. This means that you should spend a lot of time reading about the market, and creating and testing your strategy.
2. Trading fund sources
Another mistake is when people who use their essential funds to trade. In the past, it has been written about students who used their school fees to trade. It has also been written about people who borrowed heavily to trade. Using your essential funds is a mistake because of how volatile the market is. If your trades fail, it could lose you money that you need for other expenses. To avoid this mistake, you should always trade with funds you can afford to lose.
The market is driven by fear and greed. Fear makes traders avoid initiating trades because they fear that they will make a loss. This makes traders lose opportunities when they emerge. Once an opportunity emerges and passes, it is difficult to replicate it. Therefore, as a trader, you should always be willing to take risks. When you spot an opportunity, you should take it and initiate a trade. To counter the fear, you should use various risk management tools to prevent suffering extreme losses if the markets move against you.
As mentioned, fear and greed move hand in hand. In the financial market, greed has caused many traders to lose billions of dollars. In 2018, it was reported that a Barclays trader had lost more than $18 million on a bet on Turkish bonds. A year before, Bill Ackman ended his Valeant Pharmaceutical investment, losing more than $4 billion. As a trader, greed can lead to significant losses. To avoid this, you need to size your trades conservatively.
5. Letting losses mount
In the Bill Ackman example, the problem is that he let the Valeant stock drop from more than $250 to $10. He could have cut his losses when the stock hit $100, but he waited, hoping that it would recover. As a trader, you should always be ready to cut your losses. When you see a currency pair or CFD moving in the opposite direction to your prediction, cutting losses early will help you reduce the chances of a big loss.
6. Improper use of leverage
Leverage is a powerful tool that lets you trade with borrowed money. When used well, leverage can make you a lot of money. However, it also exposes you to big losses if trades turn bad. To stay protected, it is essential that you start with small leverage, and increase it as you become a more experienced trader.
7. Not using a stop loss
Finally, a common mistake that many traders make is not having a stop loss. A stop loss is a tool that allows you to stop trades when they are moving in the opposite direction. Trading without this can put you at a risk, especially when there is a flash crash. A flash crash is a period when the price of a security moves sharply lower and recovers within minutes.
While there are other mistakes that many people make, these are the most common ones. Fortunately, you can solve them easily. The secret is having a strategy and learning from all your past mistakes.