Mistakes will be made, even by the pros.
However, if you’re aware of potential issues, the better off you are.
They Don’t Have a Trading Plan
Experienced traders get into a trade with a plan. They know exact entry and exit points, the amount of capital to invest in the trade and the maximum loss they are willing to take. Failure to plan can – and oftentimes will – lead to unnecessary loss.
They Don’t Use Proper Money Management
A sign that you don’t have a trading plan is not using a stop loss. Without one, losses can get out of hand. Unfortunately, many fail to use stop losses, or even protect gains with a simple trailing stop loss strategy. Others risk far too much. A friend of mine once made 325% in a week’s time on a trade. Then he risked it all on the very next trade that cost him 90% of that 325% winning.
They Typically Follow the Herd
Another common mistake made by new traders is that they blindly follow the herd and wind up chasing the wrong stocks because everyone else is. For example, in 2005, 450 sheep jumped to their deaths. One sheep dove. Another followed. All of a sudden, a flock of sheep began jumping off a cliff for no real reason. Shocked shepherds would watch as another 1,500 jumped.
Hundreds of sheep perished, as they got caught up in herd mentality.
Each followed and jumped simply because every other sheep was doing it. And as uncommon as this may sound, it’s not. In fact, this very same thing happens each and every day among traders and investors. We buy because everyone else does. We sell because everyone else does.
But we never question what we’re really buying or selling, which can be quite costly. Instead, we take the leap simply because everyone else is doing it. And if everyone else is doing it, it must be right. Right? Well, not exactly. Unfortunately, more times than not, it can lead to failure.
We all have the same goal when it comes to trading.
Like most investors, one of your top goals has been to enjoy a financially secure retirement at whatever age you choose. That being the case, it stands to reason that your retirement “nest egg” should ideally generate above-market returns, often with below-market risk.
But to do so, you need to trade well with a plan.