While there are many mistakes that can hurt a trader, these are three big ones. Get a handle on these and many other aspects of your trading will fall into place.
Risking Too Much on Each Trade
I address risking too much a lot in my articles because it is so important. I recommend not risking more than 1% of your account on a trade, and at absolute maximum 2%. Usually I state the mathematical reason: “With using this approach even a series of losses won’t significantly draw down your account.” But that isn’t the only reason.
Here are a few others which highlight how actually risking less can produce more profit:
- When you risk 1% you are less concerned about that ONE trade, which means you are free to seek other opportunities. Like a casino, if you have a solid strategy, the more valid opportunities you trade the better your results are likely to be.
- Related to the prior point, risking 1% on 10 trades is much better than risking 10% on 1 trade. You could easily lose that 1 trade for 10%, but the chances of losing 10 trades is slim. You have the same upside, but less downside by diversifying your positions.
- Risking 1% per trade is less mentally draining than worrying about a large position (where you risk 5%+), which means your mind is actually clearer and more objective…qualities you need as a trader.
Switching From Strategy to Strategy
Most traders try a strategy for a couple days or couple weeks, but abandon it once a few losing trades show up. They seek something better; that will produce more profits, quicker. The irony is that jumping from strategy to strategy actually makes for a very poor trader, since it creates and shows a lack discipline.
Discipline is one of the key traits of a trader. So by sticking to a strategy you’re actually exercising your discipline and will likely improve as a trader. Most traders don’t even give a strategy a chance to prove itself though. Losing trades are a part of trading, even strings of losses.
If you decide to trade a strategy, stick to it for at least a month, and then look at the results. Even if it isn’t a great strategy, by risking less than 1% per trade (see above) you aren’t likely to lose much money and you will become more disciplined. If it produces a profit, you are in the minority of traders who profit, so stick with it. If it produced a loss, consider why. This information will help you select a better strategy.
Not Actually Trading the Method Selected
A trader may have a winning strategy, but they don’t trust it. Therefore, they take additional trades or don’t trade all the strategy signals. The trader is therefore not even trading the original strategy, yet the strategy is often blamed for losses. This results in the continual search for a new strategy (see above).
What most traders fail to realize is that in most cases it is not the strategy at fault. The trader is at fault for not following the strategy.
This is the mental part of trading. Our emotions tell us to do all sorts of things that are contrary to our strategy. Yet sticking to a method is the only way to counteract these emotional urges and actually gain consistency.
Before you conclude that a strategy or method of trading isn’t profitable, consider whether you are actually following the system as intended. Did you skip trade signals? Have you taken trades which aren’t part of the system? Have you risked more than 1% per trade, which could cause you to lose objectivity because you “need” the trades to work out? If you answered yes to any of these questions, you can’t blame the system; you need to look at yourself.
Getting a handle on these issues will result in other issues disappearing. By keeping risk small you are more flexible and objective to take on more valid trades which will likely increase profits. Sticking to one method of trading will create discipline and give a very good idea of what works and what doesn’t. Jumping from strategy to strategy won’t do that. Once a strategy is selected make sure to actually follow it. Most traders blame a trading system, when it is the trader who is not following it correctly. If you want to be a successful trader, don’t make excuses for yourself. Work on these issues, get them under control, and results will follow.