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7 Rookie Trading Mistakes and How to Avoid Them |
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16th Nov 2020

7 Rookie Trading Mistakes and How to Avoid Them

Article Table of Contents:

So, you’ve joined the clan and decided to become a trader. Welcome! It’s an exciting and dynamic world you’ve entered. Like all new ventures, you’re likely to make some mistakes along the way. And that’s fine, mistakes are the best way to learn. However, with your money involved, its best to avoid some of the most common mistakes new traders make. Here are the seven trading mistakes rookies make and how you can avoid them. 

1. Jumping into Live Trading without Opening a Demo Account

It’s great to be optimistic. However, a large number of traders feel overconfident and begin live trading without first practicing on a demo account. If you’re new to trading, opening a demo account gives you the opportunity to try out various features of the trading platform. With enough practice, you become familiar with the platform, can experiment with different strategies, and get to know how market movements impact your trades. A demo account simulates real-world trading without using real money. This can be your best teacher in trading and it’s absolutely free! 

2. Know Why You Are Trading

New traders today are much more knowledgeable than they were even a decade back. They understand the importance of identifying their financial goals, know their risk-taking capacity and can determine the time horizon before entering a trade. However, once they are in the excitement of trading, many forget these fundamentals and can make hasty decisions. It’s a good idea to write these down and keep them handy when trading. Not sure whether to make a trade? Check against your fundamental investing principles and see if it fits. 

3. Not Having a Plan

A well-defined plan allows a trader to evaluate when to enter the market, how their open trades are performing and when to exit. Even after strategising, new traders are more likely to stray away from their plan, while experienced traders stick to their trading strategy until there’re sure it doesn’t work.  

4. Starting with Too Many Open Orders

In trading, there are so many options – forex, stocks, metals, energies, indices, and more. Within each asset class, there may be several trading opportunities. Every asset class may seem to represent some opportunity. However, trading too much can be a double-edged sword. Firstly, a novice trader may have limited knowledge of each asset class. Staying abreast of news and events impacting each of them and making decisions quickly can be confusing and nerve-wracking. Secondly, new traders are more prone to give into their emotions. This means that the performance of one asset class may impact your decisions related to other asset classes. 

5. Not Setting Up Stop Loss and Take Profit

Seasoned traders understand the importance of having an exit strategy. There will be times when the market moves against you. Setting up stop loss orders helps curtail your losses during these times. On the other hand, when the market moves in your favour, take profit orders enable you to book profits in time, as prices can suddenly take a U-turn and move in the opposite direction. Experienced traders set up stop loss and take profit orders with every trade. In fact, many deem this to be the best risk management strategy. 

6. Using Too Much Leverage

While high leverage is attractive, it can be risky for certain securities. The opportunity to put in only $1 and gain exposure of say $10 or $100 or even $500 may appear irresistible. High leverage increases your exposure, and your profit potential can grow exponentially. However, high leverage also amplifies your losses when the market moves against your trade. It is better to take calculated risks and follow a strategy that is aligned with your risk appetite.  

7. Fear of Missing Out

FOMO is well known in the world of trading. You see an asset’s price rising quickly over a short period and you don’t want to miss out on the action. You see an opportunity to make money fast and are itching to jump in with as much capital as you can. However, chasing prices is not what makes a solid trading plan. Aiming for smaller, consistent gains is a much more prudent approach, especially as when starting out.  

These are some of the most common mistakes traders make when starting out. They are not difficult to avoid, you just need to be meticulous and disciplined with your trading. The financial markets are exciting with many opportunities on a daily basis. Mistakes will happen but learning and growing from them is what will help you have a long and fruitful experience with trading.