Arif is an entrepreneur who left his job at a bank during the pandemic. His businesses include currency trading and freelance writing.
Trading Mistakes to Avoid
As you go through your trading journey, you will most likely find yourself making all sorts of mistakes, especially as a beginner. However, as long as you learn from them instead of repeating them, you are one more step closer to trading success.
As a full-time trader, I have spent long hours contemplating some of the mistakes I made when I was just starting out. Below are four mistakes I made earlier in my investing career that I now avoid at all costs. Each is discussed in detail in the sections that follow.
4 Trading Mistakes All Serious Investors Should Avoid
- Not Using Support and Resistance Levels Properly
- Blindly Following Financial News and Expert Analysis
- Going Against Trading Rules
1. Not Using Support and Resistance Levels Properly
Regardless of whether you are an experienced trader or a beginner, you've probably heard of support and resistance levels. If you have not, don't worry; here are some quick definitions:
What Is a Support Level?
A support level is a technical barrier where a downtrend is supposed to end, meaning the downtrend should not go beyond a certain point. This is caused by an increase in buying demand that can either stall or completely end the current trend.
What Is a Resistance Level?
A resistance level is the total opposite. When an uptrend is formed, a resistance level is the technical level that prices should not go beyond. This is caused by an influx of sellers that puts the current uptrend at a pause or completely changes the direction of the trend altogether.
How Should These Levels Be Used?
Traders tend to spend a great deal of time drawing lines that act as price floors and price ceilings that help dictate whether the market is currently in an overbought or oversold state. Although this strategy can be extremely helpful in predicting future trends, over-reliance on these theoretical limits can lead to unjustified expectations.
Support and resistance levels should be complemented with other technical tools that are meant to be used in the same way. What this means is since support and resistance levels are used to determine overbought and oversold states, it's important to find another technical indicator like the RSI to help confirm those levels.
One should also not put their target prices exactly on the same level as their support and resistance lines. It is better to mediate between the two in case your expectations are not met.
Let’s take gold prices, for instance; if you think that the price is going to rise from $1750 to $1800, and you have set your technical resistance level at $1800, your buy trade should have a TP (Take Profit) price slightly lower than that—let’s say $1775.
By doing this, your trade doesn't have to float for too long before realizing a profit. And in the off chance that your resistance level is not reached, at least you have already locked in a decent profit.
However, if you feel that your trading account can withstand a floating trade and you are willing to place a TP point that is closer to the actual resistance level, then go ahead. It all depends on your own risk-to-reward ratio.
2. Blindly Following Financial News and Expert Analysis
The moment you type the phrase “trading tips" into a search engine, you will be bombarded with hundreds of analyses, tips, financial news articles, and market outlooks. Though there are many out there that are probably useful, how does one navigate through this seemingly endless stream of information?
Well, this is a question of one’s own knowledge and skill. If you are just a beginner, it is best to read up on all the concepts and theories that encompass trading. This is important. Too many newcomers jump the gun and try to go straight into trading real money without acquiring first sufficient basic knowledge.
Find one comprehensive source of knowledge and stick to it. Do not deviate. It is better to go through one set path than to experiment with too many possibilities and do a half-assed job.
I would definitely recommend Babypips. It is a great source of reading materials for beginners that works more like an all-encompassing and comprehensive online course rather than a set of random individual articles. And don't worry—it's all free.
Now, let's say you have gone through the first baby steps and are now ready to start trading live. As you progress through your trading journey, you may be tempted to watch the analyses of other so-called experts. Maybe you'll subscribe to a financial news app or a few YouTube channels that give out daily signals. Maybe you'll spend an entire day reading about major financial news online.
Now, there is nothing fundamentally wrong with any of the things mentioned above. However, consuming yourself with too many sources of information may do nothing but skew your own judgment and undermine your own analysis.
What I mean by this is that you probably spent a considerable amount of time coming up with your trading strategy, but because you are now so convinced by all these hyper-sensationalized articles and market outlooks, your own analysis that you have worked so hard now falls by the wayside. You underestimate your own judgment and overestimate the credence of others.
Let me give you an example. In early April of 2021, there was a sudden drastic uptrend in the price of gold. This lasted up until June of the same year. During this time, every financial news outlet and trading YouTuber touted out the headline of how much the gold price would soar to unprecedented heights. “Biggest bull move of the decade," their headlines would write.
It seemed like everyone and their mothers were getting in on the soaring gold price hype train. So, I wanted a little piece of the action too. As prices were heading towards their peak, I put in a buy trade in hopes that the price would rise even higher \—just like everyone said it would. I executed this order despite the fact that my technical indicators were clearly showing an overbought signal.
Sure enough, the market corrected itself, and I found myself trapped in a floating buy trade because I listened to all the noise-makers. Prices had gone against me, and I had to incur a loss.
The point I'm trying to make is that just because you see someone important on TV or social media giving you a market outlook or possible economic scenario does not mean that you should blindly heed their words. Every bit of info must always first be filtered through your own trading system. Only a fool blindly listens to the words of others—real traders have their own systems in place and trade purely based on those.
3. Going Against Trading Rules
I've said this once, and I'll say it again. The most important aspect of trading is having the right mindset. The right mindset is about having an understanding of the things you can control in your trading and the things that are just out of your hands. Things that you can control include your trading plan, your strategy, and the number of trades you execute per signal.
Make sure you never deviate from your trading system. You may find times when you may need to update and change certain aspects of your trading system, and that's fine. The point is not to let luck determine your trading.
There may also be times when you feel that market prices are acting in a way that is not in accordance with your trading system, but it could be profitable to get in on the trend. So, you may feel tempted to put a trade in hopes of a lucky profit even though it goes against your trading rules. Don't do it!
It is always better to miss a trade than to go against your trading rules. If you are putting in a trade just because you think you might get lucky, then you do not have the right trading psychology. A real trader is always disciplined. They do not give in to greed or fear. A real trader sticks to the things they can control.
As a trader, there will be times when you have to take losses. As long as these losses are manageable and within your trading system, it should be fine. Stick to the plan and know that there will be other opportunities for you to make back your money.
What's most important is to not let your losses consume your mind. This could lead to serious negative emotional side effects like anxiety, depression, and even anger. If you attempt to trade while in such a mental state, you will only make things worse. You could end up abandoning your trading rules altogether and over-trading or revenge trading.
It's a mean cycle—trust me; I've been there and experienced it so that you don't have to.
Over-trading has become a major factor in why many traders fail. Too many times have traders placed trades based on their emotions, and because of this, they ended up holding more floating trades than their account could handle, eventually causing them to blow their account.
To avoid this, you must adhere strictly to your plan. It is prudent to only trade when the conditions in your plan are met. This, however, can mean that you are not trading all that often.
I’ll admit it. Trading can be boring. You may find yourself staring at your charts all day without ever executing a trade, but this is okay. Many beginner traders find themselves on the tail end of a trend because they feel that they have not placed enough trades throughout the day.
This is known as FOMO (fear of missing out). You feel like trading just because you don't want to miss any opportunities. Again, this is where a proper trading plan comes into place. Tell yourself that it is okay to not trade even if there is some major financial news that came out or an unexpected jump in a trend. Only trade if your trading plan allows you to.
Trade With Your Mind, Not Your Heart
It is key not letting your emotions dictate your trades. Every trade that you execute must always be technically justified—not emotionally driven. Every trader's journey to success is paved with triumphs and pitfalls. As long as you keep your head up and stick to your plan, you will definitely be able to withstand the rough seas of the trading world—and move you closer to becoming a full-time trader.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.