By Justine Pollard – Author, Private Trader & Trading Mentor
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Trading is tough. It’s not easy when you first start out, and it will be a challenge – there is no doubt about that. You need to liken it to starting your first job – you have no idea what you are doing at first and it takes time and effort to learn the ropes, develop your new skill and get into a routine.
You need to consider your first year as your ‘apprenticeship in the market’. Survival is your goal for the first year as you grow your trading muscle and become a smarter trader.
Believe me, the greatest traders in the world did not always win. Not only during their ‘apprenticeship’ but even after a few years of trading.
I started trading the markets full time in 2001 and I made all the mistakes in the book. Once I realised that I was sabotaging myself, I knew that I had to take action to overcome my problems in order to move to the next level and become a peak performer in the markets.
There are 10 key mistakes new traders are guilty of, and these are listed below. Once you know about these mistakes you can take action and avoid having to learn these lessons the hard (and expensive) way.
1. Trading without a plan
Over 80% of traders will fail. This is a shocking statistic, but once you know why they fail, you can avoid making the same mistakes. The reason most traders fail is because they fail to plan and do not treat trading like a business. All professional traders have a trading plan and it is very important that you take the time to write a plan to support you in making your trading decisions.
The most important things to include in your trading plan are:
- goals and objectives
- trading structure
- trading tools
- trading style
- trading indicators
- risk and money management
- market exposure guidelines
- trading systems (including your set-up and trigger criteria for each system and exits)
- trading routine
- contingency plan for all worst-case scenarios
- personal psychological trading rules
When you are first starting out, it feels like a big task to write a trading plan, but you will feel so much better once you commit all your trading processes and rules to paper and get clear on your strategy.
Your trading plan will start out like a work in progress and you will need to update it as your trading progresses. It is extremely important that you stick to your plan – it is one thing to write it, it is another to follow it.
If you need help to write your trading plan, you can get a copy of my book, Smart Trading Plans. This book is a step-by-step guide to developing a business plan for trading the markets. The book is complete with Smart Action Steps, case studies of actual trades and a bonus trading plan template for you to work through as you read the book.
2. Not managing risk in the market
When starting out, new traders tend to focus on entry methods, yet it is money management that is the key to survival. You can get almost everything else in your plan wrong, but if you have strict money management rules that you adhere to, you are on the right path to success.
With every trade you undertake in the stock market you are opening yourself up to risk and you are the only person that can control this. The goal of professional traders is to let their profits run and cut their losses short, which is all about managing risk. It does not matter how many winning trades you have, if you can’t keep your profitable trades larger than your losses, you will not survive in the market.
The key to controlling risk in the market is to use some simple money management techniques that aim to protect your trading capital and quantify your risk. Some of the things you need to consider are:
- Position sizing your trades to determine how many shares you can buy based on how much you are prepared to lose on any one trade.
- Using a range of stop losses that will limit your losses when you first open a trade and then protect your open profits on the winning trades as they move your way.
- Managing your total market risk across all your open trades.
- Maximising on your winning positions by adding more money to those trades (‘pyramiding’) as they continue your way.
I never had a problem exiting my trades and was always disciplined when it came to acting on my stop losses. However, when I first started trading, sometimes I would exit pre-emptively in expectation of my stop being hit, and this prevented my profits from running and generating more returns. In spite of this initial weakness, as well as some other bad habits such as overtrading and trading with too much open risk, money management has been my key to survival in the markets. The fact that I limited my losses allowed me to survive the markets in my first year of full-time trading.
3. Not keeping good records
New traders tend to ignore or procrastinate about keeping good records of their trading transactions and activities. The reality is that you need a good record-keeping structure in order to avoid the mistakes above and ensure that you manage your risk in the market at all times.
Trading is a business, and it’s a good idea to treat it like a business from the beginning, no matter what amount of capital you start out trading. If you don’t maintain good records for your trading business you will not understand how your business and your trading system is performing over time.
The easiest way to track your trades and manage your risk is to have a trading diary of some form – this could be an exercise book or an Excel spreadsheet.
I use the Smart Trade Tracker to track and manage my trading activity as well as providing me with performance measurement tools to monitor and evaluate my performance in the market. It is a key part to my trading routine. My clients tell me that they could not trade without it. One of my clients calls it his ‘mission control’ in the markets!
4. Letting losses run
Trading is a game. You will have wins, but you will also have losses. Successful traders know how important it is to keep their losses small and they have no hesitation in taking a small loss if a trade does not move their way. This frees up their capital to move on to their next trade.
New traders, on the other hand, fear taking losses. They hang on, hoping it will get better tomorrow or next week and maybe the occasional trade will, which reinforces their belief. Or, worse still, they average down, buying more shares as the trade continues to fall in price. This can average out their entry price, but if the share price continues to fall, this strategy can have a devastating effect on their trading account.
The reality is that most professional traders will only win 50% of the time in their trades. But they know how to maximise their winning trades and how important it is to keep their losses small. Never try to maximise on your losing trades. It only takes one or two trades getting out of control to have a huge impact on your trading account and put you out of the business of trading.
5. Using excessive leverage
New traders have a zeal to take on a lot of risk and experiment. This can make highly leveraged instruments such as futures, options, forex and CFDs seem very attractive.
But before using any of these instruments, new traders need to do their homework so they understand the risks involved in trading with their choice of instrument. They also need to have clear money management rules so they don’t trade beyond their means.
There are strategies to trade leveraged instruments in a safe way, but safety is not usually something a new trader considers. They are often more focused on the money and they think that the larger the position the more money they can make, quickly. The reality is often the opposite. They could get lucky and have a good run, however the market has a way of showing overzealous and underprepared traders the error of their ways. It’s just a matter of time.
When I first started trading, I was attracted to short-term derivative instruments. Everything seemed to happen very fast and I got my big reality check after the World Trade Center attacks in September 2001 when the world markets fell heavily. I was well and truly overexposed, with high risk and highly leveraged positions. This nearly caused me to stop trading, but I took some time out and reflected on my trading approach. I learnt my lessons and changed my entire trading strategy. I introduced very strict money management rules, including managing my total open market risk, and spent time honing, back-testing and developing my trading systems.
6. Over confidence and over trading
Some new traders will get lucky and enjoy big wins when they first start out. This so-called ‘luck’ creates over confidence. They think trading is easy and if they trade even more they will get rich quick.
So they begin to overtrade, taking on larger positions with higher leverage, and they become so focused on the money rather than on trading that it has a detrimental impact on their trading.
Overtrading will gradually destroy your profits and cascade into significant losses. I discovered the hard way that trading too frequently was disastrous to my overall returns and performance. New traders can learn this lesson up front so they don’t make the same mistake and always control their total open risk in the market.
Once again the market will teach you the lessons you need to learn.
7. Over-complicating trading
As the saying goes, “There’s more than one way to skin a cat.”
They are many ways to understand the stock market and speculate on what’s going to happen next. Even the newspapers have opposing headlines on what is going to happen and an individual share can have a buy signal from one company and a sell signal being given by another.
As trading has become more computerised, there are even more choices available to us as traders. For example technical analysis, which involves reviewing the price and volume activity of a share using charts, has hundreds of indicators you can choose from that are designed to assist with determining the best time to buy and sell a share. However, the more indicators you use on your charts, the more conflicting results you get and you end up being unable to see a clear signal to take a trade. We think we need more indicators and that it will help, but it only over-complicates your decisions.
I like the KISS method of trading – ‘Keep It Simple Stupid’.
Trading is simply about the direction of the trend and exiting when the trend changes. It is really no more complicated than that.
If you like the idea of charting, or have bogged yourself down and over-complicated it by looking at too many indicators or reading too many newsletters, then scrap everything and start back at the basics. Back in the early days, I had to do this myself as I had too many indicators on my charts and too many trading rules. In the end could not make a clear trading decision.
So if you want a simple strategy to read charts and find shares to trade, then check out my Smart Charting 101 Online Course. It includes video tutorials, comprehensive course notes and exercises to put your new skill into practice and develop your own set of trading rules for entries and exits. You will never look at a share the same way again.
8. Trading emotionally
YOU are the most important factor in your trading. You are the one who makes the decisions. You are the one who decides what happens once you open a trade. It is what goes on inside your head that will make or break you as a trader. As the emotional intensity of trading increases, your mind will play games with you and this will affect your trading decisions. This all starts once you put your money into the market.
You will experience impatience, fear and greed and this will drive your reactions in the market. Your completed trading plan may tell you what action to take, but if you are reacting to the market based on your emotions and what makes you feel good on the day, you will override your trading rules. This reactive behaviour does not serve you in the market, and you need to become very self aware and disciplined in your trading.
You may already have experienced this. If not, become self aware now and be ready. In my early days of trading I lacked patience and I would beat myself up after exiting a losing trade or taking profits too early. Patience was elusive. I was always afraid of missing opportunities and the need to be in the market was overpowering and this caused me to overtrade.
Make sure you understand your motives for trading. Trading is not only just about making money – it’s about becoming the best trader you can possibly be, and good returns will flow from good trading. Ask yourself questions before you take action in the market and ensure your motives meet the rules you have set out in your trading plan.
9. Reacting to the news and hot tips
The financial media is overloaded with so-called gurus and pundits and their opinions on the market and individual shares. You might have a trade open in a share that is hitting your exit signal, however you read a good news story over the weekend and decide to ignore your trading rules and keep the trade open. Only hindsight will tell you if this action is right.
Vice versa, you read a good story or get a hot tip and decide to buy a share, without a clear entry signal on the chart. Often, the news comes out after the fact and has already been priced into the share. The reality is that markets are driven by the buyers and sellers and if the sellers are moving out of the share and you are given a signal to exit, then you need to take action. Without enough buyers in the market, the share price cannot keep moving higher.
10. Not seeking help to hone your trading skills
Top athletes and business people have coaches and mentors and they train and work on their skills to become peak performers in their field. However, new traders put off getting a mentor and paying money to hone their skill. They try to figure it out on their own and read lots of books and attend lots of free seminars, only to get bogged down with more information and another technical indicator or a new trading instrument to consider. They keep moving from one thing to the next without taking the time to hone their skill in one trading instrument or one trading strategy.
It can also be difficult to find a good trading mentor. I can’t tell you how much money I spent on my trading education in my early days – I liken it to a university degree. But I found it hard to find a professional trader who was willing to share their trading plan with me. There were plenty of seminars, books and even diploma courses at different institutes on the topic of trading, but they contained lots of information on more indicators, more chart patterns, or another type of market analysis or theory. I did not walk away from any of those courses with a trading system that I could implement in the market. So I developed my own by studying winning charts and back-testing across different markets, then refining my money management rules to suit.
To find the right mentor for you, first you need to understand what trading approach you want to take – technical, fundamental, or a mix of both. What trading style and instrument are going to suit your lifestyle? You can’t be a day trader if you have a full-time job. Find a mentor with a style of trading that will suit your lifestyle. If you like my approach, I don’t hold back information. I was frustrated with trying to find the right courses, so I teach and share my techniques in a way that I would have loved to have someone teach me in my early days of trading.
If you want to get inside my head and learn about my trading systems and strategies, check out my Ultimate Smart Trading Mentor Course. In this course I share exactly how I trade the markets. I also provide the codes to my market scans and all my strategies for entries, exits and money management. You will also learn about my trading routine and the extra charts I look at to form a view of the current market action.
I provide ongoing support with my Smart Traders Mastermind program, so you receive monthly updates from me and several webinars throughout the year, as well as access to a private discussion forum of traders who have also been through the course and understand my trading systems. I know that trading can be lonely, so I want to provide that extra support and a community of traders so that you can stay connected and learn from each other.
Finally
It’s natural to make mistakes when you are starting something new, that is how we learn. You may have already made several of these mistakes and had an ‘ah ha’ moment just reading through this report. With trading, it is very important that you learn from your mistakes and don’t keep repeating the same mistakes over and over. That is how you trade your way out of the market.
Recognise when you have made a mistake and ask yourself ‘what could I have done differently?’. Do you need to update your trading plan? Is there something you can do to ensure you don’t take this action again?
Don’t beat yourself up over your mistakes. They are done now and there is nothing you can do about it, just make sure you take the time to learn from them and take the right action next time.
Trading is all about learning – not only about the market and charting techniques, but also about ourselves. If that sounds like something you would like to explore, I invite you to join other Smart Traders and get in touch.
Copyright 2016 Smart Trading Pty Ltd
About the Author
Best selling author of “Smart Trading Plans”, Justine Pollard is a successful private Australian stock market and CFD trader, experienced trading educator and sought after trading mentor. Justine specialises in supporting traders to become peak performers in the market.
Justine has been interviewed in many media articles and included in top trading books such as ” Wiley Trading Guide, “20 Most Common Trading Mistakes”, by Kel Butcher, “Real Traders, Real Lives, Real Money”, by Eva Diaz and Ms Millionaire, by Fiona Jones.
If you are looking to start trading or have been struggling in the markets then Check out the different products and courses available at www.smarttrading.com.au