5 Common Trading Mistakes Beginners Make and How to Avoid Them
Author - TradeZella Team
New trader who?
New trader making some of the most common trading mistakes — don't worry, we can help you out!
We've all been new stock traders at one point, and most of us have made more than our fair share of mistakes.
Trading is as much of a mental game as it is a financial one, so it's important to stay on top of your emotions and keep a level head.
Let's take a look at some of the most common trading mistakes new traders make and how you can avoid them.
How do Traders Fall Into the Trap of Making Mistakes?
With the ever increasing access to the stock market, it's easy for new traders to get caught up in the excitement and take on too much risk.
This often leads to impulsive decisions that can result in steep losses instead of profits.
Before you jump into any trade, be sure to really understand what you're doing and how much risk you are taking on.
From forex to crypto, the trading world has plenty of options for making profits.
Unfortunately, this can also leave new stock market traders feeling overwhelmed and unsure of which path to take.
Before you start trading, make sure you have some basic knowledge about the types of markets available and how they work.
This will help you understand which type is right for you and your goals.
In this article, we will talk about everything there is to know about the common mistakes beginner traders make and how to avoid them.
Why it is Important to Avoid Common Trading Mistakes
The dreaded red screen. No one wants to see it, but it happens to the best of us.
Common mistakes are a part of trading, but if you know how to avoid them, you'll be better off for it in the long run.
By understanding what could possibly go wrong and why it goes wrong, you can make sure that those same mistakes don't happen again.
One of the most important things when trading is avoiding losses and building your portfolio over time.
The Top 5 Common Day Trading Mistakes
Repeating some of the mistakes below can have an adverse effect on your portfolio and, in some cases, cause you to incur losses that could have been easily avoided.
So let's take a look at the most common mistakes traders make and how to avoid them!
Not Having Proper Risk Management
One of the biggest mistakes new traders make is not having proper risk management techniques in place.
With any type of trading, there is always a certain degree of risk involved.
It’s important to manage this risk by setting stop-losses and taking profits when necessary.
Stop-losses are particularly important as they help limit your potential losses — if the market moves against you too much, it will automatically close out your trade at a predetermined level.
Someone who is new to the trading world might not think that risk management is important, but it can be the difference between a profitable and unprofitable trade.
So how does one go about proper risk management?
Start by setting reasonable goals for yourself and making sure you understand the risks associated with each trade.
Before entering a position, ask yourself what your maximum loss would be if things don’t go according to plan.
This will help you decide how much money you should put into each trade as well as where to set your stop-losses.
It is also important to have a strategy in place when trading.
Having a clear plan of action before entering a trade can give you more confidence and increase your chances of success.
Think about the type of trades that work best for you, such as swing trades or day trades, and practice these strategies on demo accounts before putting real money at risk.
By doing this, you can get a better understanding of the markets and how to best manage your risk.
Not Establishing a Balanced Trade Volume
Remember that movie you wanted to go out and see for the longest time?
Well, you finally got around to watching it only to realize that it was nothing like you expected.
Over trading can be a lot like this — sure, you may have heard about a trade that sounds great and could potentially make big profits, but in reality it might not turn out the way you thought it would.
Over trading is when a trader enters too many trades, often without proper research or risk management techniques in place.
This can lead to over exposure to the markets and an increase in losses if the trades don't go according to plan.
To avoid this mistake, try limiting yourself to one or two positions at a time until you gain more experience and understand how different markets work.
Not convinced that more volume does not necessarily equal more gains?
Well consider this bucko — let's say you have $5,000 to invest in the stock market.
You could spread that across five positions with $1,000 each or try to get fancy and decide to open 10 positions at $500 a piece.
Entering more trades does not necessarily increase your chances of making money — it just increases your exposure and risk.
Because those 10 positions at $500 each could turn into losses much faster than the five positions at $1,000 each.
So unless you're an expert stock market trader with a proven record of success, it is best to stick to one or two trades at a time and focus on increasing your knowledge about the markets rather than trying for quick profits.
Not all that Glitters is Leverage!
Ahh — the L word — the bane of many a novice trader's existence.
Leverage is one of the most powerful tools in any trader’s arsenal, but it can also be the downfall of many if used incorrectly.
Leverage basically allows you to open positions larger than your account balance and use a small amount of your own money to control a much larger position size.
While this can increase potential profits exponentially, it also increases risk significantly.
If markets move against you too quickly, then you could find yourself with large losses on your hands — faster than you'd expect!
If leverage trading is something that interests you, take some time to understand how it works and practice using it on demo accounts before putting real money at risk.
It might seem like an exciting way to make money, but it can be a double-edged sword and is best used with caution.
We know you are a tough cookie to convince so take this example into your calculations, my friend: let's say you want to buy $50,000 worth of a stock but all you have is $5,000.
By using leverage, you can control the same position size with just your $5k and still make profits (or losses) accordingly.
But remember — if things don't go according to plan, those profits could turn into losses very quickly due to the risk associated with leverage trading.
So it is important to be aware of the potential hazards and use leverage responsibly.
Not Using a Stock Market Trading Journal
Those first 3 mistakes were pretty obvious and self-explanatory, but this one is actually quite subtle — not using a trading journal.
A trading journal is essentially a record of your trades and the decisions you made in order to make them.
It's an invaluable tool for charting and tracking your progress, as well as helping you to analyze past mistakes and learn from them moving forward.
Without a trading journal, it can be difficult to determine what went wrong when things don't go according to plan, or even pinpoint the areas that need improvement.
As such, it is highly recommended that all traders use some form of a trading journal in order to stay organized and keep track of their performance over time.
Consider this, when a trader does not use a trading journal, it could lead to bad decisions that are based on emotion instead of logic.
After all, it can be difficult to stay unbiased when you don't have the facts and figures right in front of you!
So if you want to become a successful trader, make sure to record your trades in a detailed and organized manner so that you can review them at any point in time.
It might seem tedious at first but will definitely help improve your overall results over time.
For example, if you take the time to record your trades, you might be able to pick out recurring errors in your decision-making process — something that could have otherwise been missed without a trading journal.
Another feature that a stock market trading journal can provide is the ability to track your overall return on investment (ROI) over time.
This will allow you to make adjustments and refine your strategies as needed in order to maximize profits and minimize losses.
Not Taking Breaks
The last mistake that we are going to discuss is not taking breaks.
Trading can be a stressful and grueling process, so it's important to take regular breaks in order to stay focused and energized.
It's easy for stock traders to get caught up in the heat of the moment and end up putting in too many hours without rest.
This can lead to exhaustion, lack of focus, and ultimately bad decisions — something that all traders should strive to avoid!
So make sure you give yourself some time off every now and then — take a few days away from the markets or just an extended lunch break — whatever makes you feel refreshed and recharged.
It will help you come back to trading with a clear head, which in turn will help you make better decisions and ultimately lead to more successful trades.
You have to remember that it is normal to have losses every now and then, when those times come you cannot have a cluttered mind when you're making decisions.
Breaks will help clear your mind, and allow you to make more informed decisions.
Take this example for example, Jimbo the trader was in the middle of a ten-day losing streak.
He was feeling so drained by the losses that he decided to take a few days off from trading, just to give himself some time away from it all.
When he got back, Jimbo had a newfound clarity and was able to look at his trades with a much fresher perspective and make better decisions as a result — ultimately leading him out of the slump and onto brighter pastures!
How to Learn from Your Mistakes and Grow as a Trader
Now that you know what NOT to do, let's quickly dive into the things that you should be doing.
It's true that mistakes are inevitable, but it is also true that you can learn from them in order to make better trades moving forward.
Reviewing your Trading Journal
The first step is to review your trading journal and identify any patterns that might be leading to losses.
This will help you identify areas where you could improve, and also give you an idea of which strategies are working for you and which aren't.
This is a good way to build your intuition and understand how different markets move so that you can be more strategic with your trading.
Once you have identified areas for improvement, it's time to start implementing changes and refining your strategy.
For instance, if you find that you tend to take too big of a risk when entering trades and end up with losses, then it might be time to look at decreasing your position size.
This will help you stay within your risk tolerance and potentially increase the odds of success for each trade.
Another example might be if you notice that you are missing out on opportunities because you aren't acting fast enough.
In this case, it might be helpful to refine your entry strategies so that they can be executed quickly and efficiently.
Using Leverage Wisely
So we mentioned that *gulp* the L-word can be a major source of trading losses, and it's true — leverage can be a double-edged sword if not used carefully.
But don't worry, with the right strategy and risk management plans in place you can use leverage to your advantage.
It all starts with understanding how to choose the right amount for each situation.
You should always ensure that your position size is appropriate for the market conditions and that you have sufficient capital to cover potential losses.
This will help limit any potential damage from leveraging too much or too little.
So how do you know when and how much to leverage?
Start small and increase your position size gradually as you gain more experience.
Keep a close eye on the markets, and use technical analysis to help you determine when the right time is to go big or stay small.
Finding the Right Balance
Trading is a game of balance.
You need to find the right balance between risk and reward, and also the right balance between taking action and sitting still.
It can be tempting to jump into every trade opportunity that comes along, but this could end up costing you money in the long run.
Take your time to evaluate the situation before making any moves — this will help minimize your losses and maximize your profits.
When it comes down to it, learning how to manage losses is key if you want to become a successful trader.
It takes practice and discipline, but with a good plan in place you'll soon be well on your way!
The Bottom Line on the Common Trading Mistakes
We started with a knock-knock joke, and according to the International Rulebook of Trading Blog Writing, we must also end with one… it’s the rules.
Don't cry, trading mistakes don't have to haunt you forever! Let's review some of the key points we discussed today:
💡 Take time to review your trading journal and identify patterns that may be leading to losses.
💡 Refine your entry strategies so that you can take advantage of opportunities quickly and efficiently.
💡 Use leverage wisely by understanding how much is appropriate for each situation and sticking to it.
💡 Find the balance between taking action and sitting still, and minimize risk with a good plan in place before making any moves.
Of course, using the right tools like TradeZella to journal and analyze your trades can help you make more profitable decisions over time.
TradeZella also provides access to advanced features like an analytics dashboard, advanced filtering, and winning percentages — so why not give it a try?
And there you have it — the common trading mistakes and how to avoid them!
Don't be afraid of taking risks as long as you understand the risks involved.
With a little knowledge and dedication, you too can become a successful trader. Good luck!