well known fact that 95% of “retail” traders (i.e. the small
speculators) will lose money trading the financial markets. Little
wonder then that small speculators are referred to as “dumb money” by
investment professionals and monitored as a contrarian indicator for
future price direction.
It is not simply that the little guys choose the wrong trade, there
are a number of classic mistakes that are repeated over and over again
that mean losing is all but a certainty, leaving the 5% of winners and
the professionals to clean up.
This article highlights what we believe to be the top five mistakes
that traders make that can be avoided and increase your odds of success
1. Not Planning Your Trades
is not sufficient to look at a particular market, choose to either buy
or sell and cross your fingers hoping for the best. You must devote
time to study your chosen market, decide whether the prevailing trend
is up or down, what timescale this trend is over and where the points of
support and resistance are.
You have to plan where you are
going to buy or sell, where to place your stop loss and most
importantly where to exit the trade. Then, once the trade is planned
and executed, you must show discipline – you made the trade for a good
reason with solid justification, so any changes need equally solid
2. Lettings Losses Run and Closing Winners Too Early
is a tendency to become too emotionally involved with a trade once it
has been placed, and to want the trade to succeed too much.
Therefore, novice traders tend to let losses run too long, by either
widening stops or ignoring signals that the trade is going wrong, in a
desperate attempt not to lose money. All that happens is when you do
eventually lose, the loss is a huge one.
Learn to take small
losses and you won’t ever get smashed by an enormous loss that blows
you out of the water completely – the markets will always be there
tomorrow, as long as you still have capital, you are in the game.
On the flipside, novices tend to get over excited when their trades
move the right way and into a profitable position and the tendency is
to close the trade out earlier than planned to “bank” the profit. Of
course there are times when this is the right course of action, but if
your plan said close out at a certain point, unless something has
changed, stick to the plan.
3. Chasing Losses
loss on a trade (hopefully a small, manageable one – see above!) the
natural urge is to “put it right” by getting straight back into the
markets and winning the lost cash back as soon as possible.
As we know, the only way to trade is by planning each trade and
executing it carefully, jumping back in to the markets after calling a
losing trade is NOT going to work.
The best advice is to take a few days out of the markets, regroup and plan your next trade.
many traders tend to overtrade, placing too many trades that haven’t
been planned properly just to be “in the game” and part of the action.
We at UKGTE only make about 10-20 carefully planned trades a year as
overtrading means more money is lost on commissions and spreads and the
likelihood of losing is higher as trades are more frequent.
5. Staking Too Much
Money management is the key to real success – too many traders risk
far too much of their trading pot on each trade, looking for the “big
win” rather than gradual and controlled growth through smaller more
If you go seeking the “big win”, more often than not you will end up finding the “big loss” and then its game over.