Trading Mistakes every Trader should Avoid
The volatility of the market makes it more exciting to traders, which can be a trap because of greed takeover. Some traders fall victim to making one or several of the following mistakes. Read the rest of our blog and try to avoid these mistakes for a better trading experience.
Not having a Trading Plan:
Having a trading plan is one of the most important steps before you start trading. There are some questions you need to be able to answer before trading.
What makes me go Short or Long Based on the Chart?
When speaking about trading, analysts often refer to an investor having long or short positions. To understand the two terms, when the investor has a long position it means he has bought the stocks, and owns them, expecting for the price to rise. On the flip, when the trader goes short, it means that he/she has sold the shares without yet owning them, in hopes for the price to fall. In this scenario, if the price continued go-ing up, the short seller may be subject to a margin call from his broker.
What Charts should I Look at?
Here is a general view of the basic charts and related concepts:
- Price and Volume
Looking at the price alone is not enough to decide to buy or sell. For this purpose, it is important to look at both the price and the volume. For instance, if the stock price falls, but the volume is far below the average, this could be a sign that the large traders are not selling aggressively, which is still an opportunity to hold the stock. On the other hand, if the stock is showing a gain, but the volume of shares is low, this could mean it is just a head-fake, or else the volume of shares traded would spike.
- Moving Average Line
The line tracks the price movement over a period of time, depending on the investor’s intention to hold the stock. Therefore, you should always monitor how the stocks behave when they are traded around the moving average to know if it is the right time to buy or sell.
- Relative Strength Line
It is a quick way to determine if the stock is a leader by comparing the stock price performance to the S&P 500. The sharp rise in the RS line shows that the stock is performing better than the market.
What is my Price Target?
Putting a price target helps traders to decide when to buy and when to sell, based on their due diligence. professional How-ever, it is all based on a calculated guess even for traders.
How much am I Willing to Risk?
The amount of money you are willing to risk varies depending on the risk appetite and tolerance. It either can be a percentage or a dollar amount. For some they are willing to risk 1% of their total account, for others it is up to 3%. However, it is recommended not to risk losing more than 2% to 5% on one trade.
How much is my Target to Gain?
The gain target is the price level on the chart you set for prof-it, depending on the chart. There are many ways and tools for such technical analysis, but the most used two are the Sup-port and Resistance, in addition to the Average Daily level.
- Support and Resistance Point
Support can occur when falling prices stop and start to pick up. While resistance is where the opposite takes place. When the price breaks the support or resistance point, a new level will be formulated. For this purpose, it is not always accurate but still helps us to identify possible points where the price may change direction. Minor support and resistance points may delay the price change.
- The Average Daily Level
It shows the average for a specific time of the daily high and low price. The ADR indicator is a very simple and easy trading tool that can be plotted on a chart.
Ignoring the Economic Calendar, Events, and News:
As a trader, an economic calendar is an important tool for you. It shows the scheduled news events related to the economy and financial market. Some of these events have a big effect on market volatility. For instance, interest rate decision, employment rates, and non-farm payroll numbers each have their own impact on the economy. Moreover, other events may have a medium to small effect.
If you are a stock options trader, check the US earning calendar, which has a considerable impact on prices, just like the economic data releases.
Being Irrational or Emotional:
Traders should exit the market as soon as they realize that they are mistaken, taking the smallest loss possible. This because once they are out, they will be patient and re-enter the market when a genuine opportunity presents itself.
Emotional traders may invest larger amounts after a loss to compensate, which accordingly increases their risk. This is also correct in the case of obtaining profits. So, the trader may stop following risk management and become overconfident.
Forex traders need to be rational, or else they will not be able to reach their goal of profit.
Being Uncommitted or Unengaged:
Becoming a trader needs commitment for research, planning, and setting your strategies, but the reward is for sure worth it. The market is dynamic and interconnected. Being committed to studying economics, politics, as well as fundamental and technical analysis is vital. Self-education and keeping abreast of coming market events are important and can be successful ways to supplementing your income as a part-time trader or a full-time professional.
Neglecting Risk Management and Correlation:
Risk management is important for traders to reduce their risk or loss. The reason many forex traders lose money is not simply due to the lack of knowledge in the market, but because of poor risk management. Controlling your emotions, having a plan, in addition to taking profit and stopping loss can all help to reduce your risk. Moreover, the diversity of your forex portfolio, by not putting all your eggs in one basket and knowing the correlation between the forex pairs and industries you can get a realistic profit.
Having a correct, strategic, planned, and foundational base to trade is important. Also, having the attitudes of successful traders can be crucial. Taking the time to understand the dos and don’ts of forex trading will benefit you in the future. Eventually, all traders will make mistakes and learn from them, even professional investors. Always keep in your mind that the reward is worth it.