Mistake number 1: Emotional attachment to losses, this is the first mistake on the list as it’s the most common mistake that new traders/investors tend to make. You set up a trade with a stop loss at 100 points, the trade starts moving against you so you adjust the stop loss to 200 points. At this point you decide in your mind “how low can it go?!” or “it’s gotta go up at some point,” (aka “hopium”) and you keep adjusting the stop loss until you are destined to lose much more than you were willing to initially lose on that trade.
Mistake number 2: Taking small (insignificantly small) profits. In a way, the execution of this mistake is very similar to mistake number one except of course it goes in the complete opposite direction. You enter into a trade, see that you are “in the green” and decide to take the profits before you reach the take profit that you had initially planned, and price moves on and hits your initial target…
Mistake number 3: Trying to recover losses in one big trade, Aka “Revenge trading”. After taking a few hits from the market you decide to open up one high leverage trade to recover all your losses. However, you lose that trade too and end up losing far more than you should have and proceed to “ragequit”.
Here are three simple rules to help prevent these mistakes:
Rule number 1: Detach yourself emotionally from your trade; this is not a long-term relationship with the love of your life. Remember, trading is like running a business, if it’s not profitable, then you should end it.
Rule number 2: Decide on a strategy and stick to it. Choose a risk/reward ratio on your trades, if the reward is higher than the risk, and if you have 60% winning ratio on your trades, over the long run (after a month, quarter and even a year) you’ll be in good profit.
Rule number 3: Manage your risk appropriately in conjunction with your own risk appetite, even if that means using low leverage and risking no more than 2% of your equity on a single trade.