When it comes to trading mistakes, you can make a really long list. But these are the three most common mistakes that traders make.
1. Not Knowing How to Trade with the Trend
If the market is going up people can’t bring themselves to buy into that market. They always want to try and pick the top, so they are going against the major move in the market. And vice versa, for falling markets, it’s sliding plenty of people that are trying to pick the bottom.
But, what are the chances If you have a market that’s gone up for six months or down for six months that you will nail the absolute turning point? It’s highly unlikely.
There are so many markets we could pick at the moment when it comes to looking at trends. But on this example data shows that some brokers were feeling like 70 percents of clients were selling short euro.
In a trend like on this picture that is an example of the eurodollar and a strong uptrend, our approach should be looking to buy the dips if you are selling short. So what are the chances that you are going to pick the absolute top?
It’s much easier to try and position yourself for maybe the next swing over the next few hours, days, weeks or whatever your timeframe is. Trading with the trend should be at the core of our approach but so many people get wrong because psychologically it’s a difficult thing to do.
It’s much easier to identify a trend on the chart and it’s pretty clear what to trade with that trend. There we go, we want to try and trade with the trend and to put the odds in our favor. But If a market is going up over the timeframe trading you should be a buyer and if a market is going down, be a seller.
2. Trading Too Big
People might open an account with, let’s say $1000, but they risk far too much on one trade. They do a trade where they’re risking to lose $250 and that is a massive risk compared to the size of the account.
It is very difficult to look at the market objectively if you’re in a trade. If every point the market moves against you or in your favor it’s a massive sum of money. But, whatever that sum of money is we need to trade at a level where we are not obsessing about every small point move in the market.
Even If your account grows, ask yourself are you really comfortable with a level of risk you’re taking there. Because If you’re not, and every time the market moves a little bit against you, you’ll be panicked into making maybe bad decisions, getting out the trade too early or setting your stop-loss in the wrong time.
3. Setting Stop-Losses Far Too Tight
First of all, if you are not trading a stop-loss you are just hoping that the market is going to go in your favor. You don’t really have a strategy for getting out If you’re wrong. And that’s a real issue. If you can’t admit you’re wrong that’s the real problem when it comes to trading. But let’s say you do use stop-losses.
The most common mistake when it comes to using stop-losses is setting them far too tight to where the market is trading. You don’t even give the trade time to work in your favor. So worried about losing on a trade, you’re not even giving it a chance to be a winner. This is an example of the price of oil.
So on this picture, each candlestick represents an hour and we got the last week of July and the beginning of August as our trading.
Let’s take the last day, the fourth of August, the markets traded as low as 48 dollars and 48 cents, that was 11 o’clock in the morning.
The hight of the day was $49.61 and that is 7 o’clock in the evening UK time. So a market has traveled through a $1.13 of range. So 113 points of the range. And that’s a pretty typical day for the price of oil.
Clearly, we got a big day there but typically 113 moves are not unusual for the price of oil. But plenty of people will try and trade volatile markets like this with incredibly tight stops.
Let’s say you’re trading and you’re buying oil where it’s market on the picture and you are using a 10-20 point stop. The chances are you’re going to get stopped out just in the noise of the market. So you’re not giving your trade time to work out. And if you’re buying in here because you think it’s going up, and using a 10-15 stop, the market is going to stop you out, because this is a day where the market moves to a hundred points.
So, we need to give some thought to the size of our stops. Don’t be afraid to use wider stops and trade a little bit smaller. And of course, set them in logical areas rather than just buying or selling randomly and hoping the stocks work out.
For example, it’s always easy to look at these things in the past, but in early morning between eight to eleven o’clock the prices will come back down to about $48.50, $48.60 and over a previous couple of days you can see on the picture that whenever we’ve seen the market dip down to sort of $48.30, $48.50 we see that the buyers can back out.
So If we’re buying on the place marked on the picture, a logical place to have our stop-loss is the other side of these old loans.
We are giving a market time to prove us right rather than setting a stop-loss that’s just going to get taken out during the normal noise and normal trade of the market throughout the day.