8 Common Trading Mistakes Beginners Make
Trading the financial markets can be daunting when you are a beginner. Not having the correct measures in place could lead to potential losses. There are some mistakes traders make that could lead to errors and bad judgement calls, ultimately costing them.
Make sure you have a trading plan in place
Before you open a position make sure you have a plan in place. Creating a trading plan will help you to plan out your goals and objectives. Having a desired outcome in mind will help you monitor your trades and give you discipline when navigating the financial markets. You should create a trading plan that has been specifically tailored to you, rather than copying one already out there, as that can be generic. Read more on creating a trading plan with Eightcap here.
It’s not just enough to create a trading plan, make sure you stick to it!
Once you start trading it can be easy to waver away from the initial trading plan you created and this is one of the most common mistakes you could make. Therefore, checking back with your trading plan before opening a position and checking in after the position has been closed will help you move forward.
Before trading, some people may have unrealistic goals and expectations. They can also expect profit only outcomes which may not happen, especially if the market moves against your favour. Another similar error that traders can make is expecting consistent profits after experiencing a few of them. This overconfidence could cause poor decision making. Traders could open positions without researching and taking their time to carry out market analysis. This could instead lead to trading losses. Therefore, sticking to your original trading plan is important.
Not researching before you trade
Both new and experienced traders sometimes make the mistake of opening positions on the financial markets based on a hunch or gut feeling, while this can lead to profit you should still research and conduct market analysis before you execute a trade. Understanding the market you want to trade can prepare you for unexpected market conditions, for example knowing if a particular asset is subject to large bouts of volatility.
Letting your emotions run your trades
Trading with emotions can be fatal as it could affect decision-making. Trading can be an emotional rollercoaster, as you experience excitement when you gain profits and distress when you face a trading loss. This can also lead you to deviate from the plan you originally created and could also lead to making snap judgements in order to claim losses back. There are many things to avoid when it comes to trading with emotions, read our guide on trading psychology to learn more about how to remain objective while trading.
Not understanding how the risk-to-reward ratio works
Before opening a trading position you should always have an idea of how much capital you are willing to risk and lose if the market moves against you. The risk-to-reward ratio should be taken into account, as you will be able to determine if the possible end profit is worth the risk of losing capital. Learn more about how the risk-to-reward ratio works here.
Not understanding how trading on margin works
Trading on margin involves placing a small initial deposit which will give you full exposure just like if you went to open the full value of the position. When trading on margin, some traders forget that even though profits can be magnified, so can losses. In order to gain a better understanding of this before trading, read our guide on leverage and margin.
Failing to put in place stop losses
Experiencing a loss while trading is inevitable. You can’t guarantee that a market will move in the direction you want it to, especially when something unexpected happens. However, setting stops will be able to minimise trading losses as much as possible. Stops close the position which moves against the market and limits can also be placed on a trade which will close a position after it reaches a certain profit level. When placing stops and limits, you also need to bear in mind that something called slippage could occur. This is when the stop level you set doesn’t close at the level you have required. This often happens when you leave a position overnight and the price jumps from one to another due to inactivity that has occured.
Want to try a free demo trading account with Eightcap?
Every trader no matter how experienced they are will undoubtedly make a mistake at some point during their trading journey. This guide has pointed out the common mistakes that traders tend to make so that you know what to prepare for before opening a position on the financial markets. Before you buy or sell an asset, why not practise with our free demo account? Open positions with virtual money and gain exposure to real-time market conditions.
Trading on margin is high risk.