• How can greed crush traders?
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  • Why do I Visualize what a beginner trader would do?
  • What can lead to success in many aspects of life, but not in trading?

Trading mistakes are the bane of a trader’s existence. It can be detrimental to your portfolio and your confidence. Psychology is a huge part of trading, so traders need to be disciplined and have a plan for anything that comes their way. 

That’s why it’s so important for traders to keep focused and ready, but that’s easier said than done. I want to go through some of the most common trading mistakes traders tend to make so you can be fully aware of the pitfalls many traders go through. Learning from others’ mistakes is one of the best ways to understand how bad practices can jeopardize your portfolio, so let’s get into what those mistakes are. 

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Common Mistakes in Trading

Human nature is prone to making mistakes, that’s how we learn, and society has advanced because other humans have made mistakes; it’s called trial and error. The market is no different; traders are better off learning from other traders who have had immense trading losses.

What John Carter Does

Fear of Missing a Move 

A trader fearful of missing out is when a trader sits, amazed that the market continues to run away without him. Finally, they can’t take it any longer and decide to act, as they don’t want to miss any more uptrending moves. 

The trader will jump in and buy. Or, in the case of a market in free fall, the trader will short the market. Experienced traders can see when markets or positions make significant runs on their charts. It will often represent the high or low print of the day. 

Greedy Trading Mentality

Let’s say a trader has a $10,000 account and is cranking out $250 a day with a steady system for taking trades and managing positions. One day they wake up and think, “$250 isn’t enough. I want $500.”   

When greed kicks in, this automatically starts a process in the brain that causes all of the classic trading mistakes: overtrading, not sticking to parameters, rampant emotions, yelling at the screen. The “Home Run” mentality is the downfall of all losing trades. However, this is where a trader refuses to take a $300 profit because they “want a bigger trade” to make that $500 goal. This is how winning trades turn into losing trades and how a $100,000 account turns into a $5,000 account.

Complacent Trading

Complacency happens when a trader has a great trading day, and the position they have is moving their way nicely and causing minimal stress in the form of deep retracements. In this situation, the trader feels great. It’s a joyous, overwhelming feeling of warmth that a trader rarely feels when trading the markets. 

So what does the trader do? They start adding to their position to experience even more joy and warmth, doubling and even tripling up. Smart? Maybe with the use of the correct setups, chart analysis, and indicators it might be a great idea. However, the trader is doing it out of feeling great and good about their position, not under any technical observation. It’s like pyramiding a position, this will only end in one way, and in one way only: Very, very badly. 

Now we have a basic understanding of why and how traders get themselves into trouble. Let’s go over how traders can mitigate their losses, by understanding good practices to apply to their position. 

How to Avoid Trading Mistakes

Traders are going to make mistakes, it’s human nature; there is too much going on in the market that it is almost impossible to have a perfect track record. However, we can try and do the best we can every day we are in the market, that is all we can expect from ourselves. Below are some of the things I do to keep my portfolio safe. 

Cycle of a bad trade

Protect your Gains

When I’m in a trade that is going my way, and I start to feel overly excited and feel the urge to add to my position, I use this as my trigger to set up a “double stop order.” As an example, let’s say I’m long 10 Micro E-mini S&P contracts. The market is screaming higher.

I fantasize about how many nights I could live at the Four Seasons on Maui with the day’s profits. I take the “Four Season’s Trigger” and place a trailing 2-point stop for 20 contracts, double the size of my current position. What happens next is that I will stay in the trade as long as it is moving higher, but once the market turns, not only am I out of my position for a nice profit but I also simultaneously short 10 contracts to ride the downward trend. 

This process takes advantage of the market dynamics of human emotion in a very clean fashion. The sell-off will be from other traders who succumbed to their emotions to buy at the top due to fear of missing a move or the euphoria of having a current winning position. Once the market does reverse, these traders will provide the fuel for the move down, as they start dumping their positions once they can’t take the pain of losing any longer.

Capitalize from Other Mistakes

When in a trade, I visualize what a newer trader would be doing – or what I would have been doing years ago. “If I entered a particular position, where would be my pain point?” I’ve found on the S&Ps that a move of 6 points without any meaningful retracements is the maximum “uncle point” for most traders. When I see this, I picture myself with a newbie entry and try to imagine the pain they are feeling. After about 6 points, I know they won’t be able to take the pain any longer, and I step in and take the opposite side of this move.

Understand Your Emotions

A more technical way to measure emotion is to watch the ticks. Whenever I see tick readings over +1000 or -1000, I start fading the move. If we get a +1000 tick reading and I am long, I begin exiting the movement and initiating a short position. The reverse is also true. In these instances, I am using a 4 ½ point stop and a 3 point target on the Micro E-mini S&P’s. If neither my stop nor my target hasn’t hit after 25 minutes, I exit the trade at the current price.

Listen for Market Noise

My trading partners and I run a trading room, and one of the things we all like to do is watch how the newer traders react to the market action. There are “noises” that the people in the room can use. One of the classics is when the market is falling, and one of the newer traders initiates the “submarine dive, dive, dive” noise. Immediately upon hearing this, I know it is time to cover my shorts and go long. The experienced traders in the room also know this, and of course, we then share this information with the newbie trader. Once he catches on, we just have to wait for the next free trial to show up.

Get in and Get out of your Trades

Whenever traders I work with start slapping each other on the back as the result of a trade (or if I do it for that matter), I immediately close out my position. This is the result of extreme emotion, and extreme emotion is not sustainable. I call this the “high five sell signal.” 

Keeping Disciplined

The financial markets naturally take advantage of and prey upon human nature, especially when it comes to greed, hope, and fear. The key to remember is that the most significant market movements do not occur when traders in general “feel like buying.” They occur because groups of traders are all getting skewered simultaneously and are forced out of a position. 

In reality, traders are not trading stocks, futures or options. Experienced traders trade the trader; they understand what a new trader would do, know the emotional trade behind their decision, and then apply the opposite. The profitable trader learns to be aware of the psychology and emotions behind the person taking the opposite side of their trade. In addition, they go a step further and learn to recognize their feelings and emotions, letting them run amok, generating buy and sell signals worth their weight in gold.

After reading this article, if you recognize some of these mistakes, consider joining us in the Simpler Free Trading Room. Traders like yourself can trade in a community led by a professional trader. Sign up today and access the free trading room, recorded sessions, and free classes. Why trade alone when you can trade with us.

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FAQs on Trading Mistakes

Q: How do you develop trading psychology?

A: Some of the tips to master trading psychology are: find a strategy you like and stick to it, find a good trading community, set your performance goals in years, not months or weeks, and find a mentor that you can trust and follow.

Q: How much of trading is psychological?

A: Some experts say that 60% of trading success is psychology.

Q: What is a trading system Van Tharp?

A: Dr. Van Tharp is known for breaking down the trading process into three categories that affect traders: Trading strategy, money management, and psychology.

Q: What is a trade discipline?

A: In a nutshell, trading discipline is emotional discipline paired with clear trading strategy and consistency.

Q: What is Hindenburg Omen signal?

A: The Hindenburg Omen is a term used in stock trading where certain market conditions align to form a signal. For instance, it’s a warning that conditions are ripe for a steep market decline.

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Originally Published: Oct 25, 2016

Updated: Jun 7, 2022