Top 10 Beginner Trading Mistakes
New to trading? Unsure how to place your first trade?
No need to panic – Have a read through this article and help eradicate many of the main mistakes made by beginner traders!
Opening your first trading account is exciting – There’s no doubting that. You get approved, you fund your account, you login, and you’re presented with all the markets under the sun, an awesome charting package and best of all… The BID/ASK trading tiles – almost begging for you to place your first trade!
And that’s what a lot of new traders do. Place their first trade. And their second. And their third. And it’s when new traders follow this method without learning some fundamentals around trading, where the problems start.
Way too many new traders get over-excited and just want to place a few trades. They may not choose to place enormous trades at first. But a lot of the time, we see new accounts ‘testing the water’ with small to mid-size trades, having absolutely no idea what they’re doing, and then losing a sizeable chunk of their initial deposit and wondering where it all went wrong.
Don’t do it! If you want to ‘test the water’ (and you should) open a demo account first! Trade away! That’s what demo accounts are for. Make your initial and silly mistakes on these accounts. Why? Because it doesn’t cost you a penny.
Now, the lack of a demo account… that’s a bonus and not included in our actual Top 10 Beginner Trading Mistakes!
Read on to reveal the Top 10 beginner trading mistakes that almost all beginners seem to make:
Number one in our list of top 10 beginner trading mistakes is Over-Exposure. If you’re looking for a Red or Black scenario – you may be best suited in the Casino…
A number of new traders look to ‘hit a home-run’ with their first trade – and what better way to do that, than to stick all your eggs in one basket and leverage yourself to the hilt!
Catch the move right and you could absolutely hit a home run. But the odds are pretty slim. What is likely with this strategy? Most likely a market move that will wipe out almost all of your initial deposit and probably leave your account being stopped out.
When you open your account, you will be given or you may be able to choose your ‘leverage’. This means you don’t have to put down the full amount of margin to place the trade. You will often only have to put down a small %. Let’s say for example, in the physical market, the trade would require £1000 initial margin. Your account may only require you to put down 1% of that – Which would be £10.
The mistake here would be to take advantage of the lower initial margin by adding and adding to the position until all of your margin is used up. You now have a large position, with little margin to maintain the position. Therefore, an adverse market move can wipe you out pretty quickly.
We see this a lot – So its definitely a good piece of advice to follow!
- Trade too many different markets
When you start your trading journey, its can be fairly daunting to begin with. Jargon, software and charting to name but a few notable and understandable teething issues.
The last thing you need to do is flood yourself with too much information by trading too many markets. Especially when you don’t understand the mechanics behind each of those markets.
If you’ve opened your account to trade stocks and you’ve been following AAPL closely… great. Do that. You might even have a dabble in some other blue chips while you’re at it. But don’t throw money at the VIX, South African Rand, Put Options and WTI, just because those markets have been made available to you.
You could have a VIX trade on at a key support level you didn’t realise was there. You could be short USDZAR over a South African Interest Rate cut. You could get caught short over an inventory order for oil supply. And don’t get us started on the potential disaster a put option could cause!
The main takeaway here is – Pick a market or a small handful of markets to start with. Learn them. Make sure you understand them. Use an economic calendar to support them. And build from there.
Don’t run before you can walk!
- Not using Stop Losses
Stop losses are a fantastic tool. Not only for beginner trader, but for all traders in all walks of life. Think of a Stop-Loss as your ‘Safety-net’.
Let’s say you have placed a trade and it’s all going wrong. You may have picked a price point prior to this that you see as ‘your out’. But if you haven’t entered this price into the system as a SL order, then you will remain in the trade until you place a SL or you cut the trade yourself (or worse, it is closed for you!)
From experience, doing your analysis first and entering a SL order is far better using the above example than trying to close the trade yourself allowing emotions to creep into the picture. If you stay off the trigger and the price keeps going against you, it can really start to hurt and you may start to become less and less likely to close the trade until the loss is either realised for you or you just can’t take anymore pain and you close yourself.
Finally, SL are great if you’re not in front of your screen 24/5. If you have a trade on overnight whilst you’re asleep for example, its better waking up knowing that your 20 pip SL was triggered, than to wake up to an account with a 0 balance!
- Taking small profits
Something we see on the desk all the time, is a client place a trade, and the trade in question, is by all rights, a good one! Say EURUSD has gained some nice upward momentum, the fundamentals and technicals behind the move are strong and the clients trade has just ticked into profit.
A huge % of traders see their pnl turn green and think – brilliant, a winning trade. Better close that trade while I can right?
Wrong. If all the fundamentals and technicals behind the trade are aligning, don’t be afraid to let your trade breathe. Look at your chart, use some indicators and pick a level for a Take Profit order for example.
Far too many traders close their winning trades too early and run their losing trades for too long. Which bring us to number 5 nicely!
- Running large Losses
As mentioned above. One of the most common mistakes we see get made, is the – close winning trades too early and run losing trades too far. This is a common theme at every firm I’ve worked at and I still see it ALL THE TIME.
Stop losses are there to help you limit how much you lose per trade. Use this facility – don’t leave anything to chance if you are unsure. If you have taken the time to learn some technical analysis, then use it to help you pick price points where a stop loss can come in to play.
As soon as we see behaviour that is a combination of points 4 and 5 on this list – we know that the clients in question is either 1 – a complete novice or 2 – someone who hasn’t done enough research or learning.
Don’t fall into either of those categories! Know when to take your medicine!
- Not enough margin
Point 6 can be closely linked to point 1. Where clients place too many trades with not enough margin. But that’s not the only point we’re trying to make here.
If you have chosen a particularly risky or volatile market, then placing a large trade and not leaving much ‘maintenance margin’ in your account to facilitate the pnl swings – you could get yourself into some trouble. Give yourself a buffer to give yourself a chance of keeping your trade open and to facilitate swap charges (If your symbol is charged them)
The final point to make here is news releases. Use an economic calendar to figure out when news and data will be released and which datasets will affect your position. If you don’t have too much margin left on your account and you want to retain your Gold position over Non-Farm payrolls… fund your account and add that buffer.
We’ve already mentioned this a couple of times already for some other examples – But it’s a biggie. Use an economic calendar to assist your trading strategy – Simple.
It doesn’t matter if you have a tab on your browser, have your calendar saved on your favourites toolbar or you are old school and print one out for the week ahead! Just ensure that you are using it and using it properly.
Filter out the country’s you don’t want to see, filter out the low volatile numbers if you don’t deem them necessary to your trade. Set your time-zone (important) and you are already in a much, much better position than those beginner traders that don’t.
Prepare yourself and be aware of whats happening in the world!
- Lack of knowledge
Another really simple point here…
Not only does a lack of knowledge of the environment you have chosen to enter and the products that you will trade, often result in a bad experience. It can also lead to embarrassment and time wasting when it comes to questions or complaints you may have.
CX and Support teams at retail brokers are pretty large these days and that’s mainly to deal with an abundance of requests. Which is fine. And it’s perfectly normal.
But what we do see a lot of – is clients calling asking relevant and understandable questions about trades… AFTER they’ve made mistakes. Clients complaining … AFTER they’ve lost some money because they didn’t understand some basic MT4 functionality.
Just put a bit of time and effort into some basic learning before you start your live account and you’ll save time, make better decision and have a much better grasp of the trading world you’re now a part of.
Do your homework!
- Letting emotions get the better of you
Trading Psychology! *Shudder*
In life, it’s easy to let your emotions run away with you. And this seems to be amplified in the wonderful world of trading!
Here are some of the key emotions that creep into the picture and you should try and learn to harness:
- Too much Excitement!
Trust me – we’ve experience all of these emotions and a lot more over the years!
So how do you deal with these emotions? There’s a few methods we can look at:
- Create a trading plan
- Stick to your trading plan
- Take a step back after a bad day or run of bad days
- Be Patient
- Don’t place trades if you’re in the wrong mindset
- Know when to quit while you’re ahead if you’re in a “purple patch”
This covers a small part of trading psychology and emotions so some further reading may be required. But just know that emotions can have a pretty hefty impact on your trading.
- Risk / Reward
Not only a saying that is used around the world, but terminology that will assist your trading enormously.
Risk/Reward Ratio shows the amount of downside potential compared to the amount of upside potential of a trade.
How is this expressed? As a ratio! Any number that reads above 1 is usually seen as a riskier trade. And anything below 1, basically means that the upside potential is greater than the potential risk.
A ratio of 1:4 shows that a trader will risk £1 for potentially earning £4. They call this the ‘expected return’.
Knowing what you are risking and knowing what you could lose are an essential part of any risk management strategy. And the use of Stop Loss orders and Take Profits can also aid this process.
Ensure you’re aware of not only your rewards, but also your risks!
If you’re now ready to take the first step in your trading journey, please click here to open your account today!
Good Luck and Happy Trading!