Six Mistakes That Beginner Traders Usually Make And How To Avoid Them
All kinds of people go into trading for easy money. Beginners think that trading is easy: look at the chart, click the button and then earn a lot. In fact, 70% of traders lose money more often than earn it. And it’s not due to lack of skill or technical analysis ignorance, but due to common mistakes caused by emotions.
We’ll tell you about six typical mistakes in trading and will advise you how to avoid them.
Buying at the pike of growth
Beginners often buy a cryptocurrency at the end of an upward trend. Wall Street Cheat Sheet illustrates their behaviour perfectly.
Average trader experiences several emotions stages during the market cycle:
- at the beginning of the trend, the trader does not believe in growth — their fear is stronger than greed;
- in the middle of the trend, they wish they’d bought earlier — so fear and greed are balanced;
- at the end of the trend, the trader enters the position — greed is stronger than fear;
- and when the trend reverses, the trader loses money.
Why this happens: Prices for cryptocurrency move chaotically. Bill Williams writes about it in his book “Trading Chaos”. According to him, 7 out of 8 cases of price movements end in a rollback, and only one of them starts a new trend.
Experienced traders enter the position with every such movement. They hope that the profit from one trend deal will cover the losses from 7 unsuccessful ones.
Novices miss the beginning of the trend because they’re afraid of retreat and waiting for more favourable conditions. But at the end of the trend, they regret previous decisions, buy an asset and in result create hysteria when the price fluctuates to a new maximum.
And that’s just what the big players are waiting for. At this point they sell their assets to greedy newcomers and leave the market altogether, unconcerned by the fate of novices who bought from them and now pretty much doomed to lose money due to unprofitable purchases.
How to avoid this: Do not buy assets on the market which shows signs of hysteria.
Let’s imagine a situation when a beginner sees the signal of the growing trend and buys their preferred cryptocurrency. Then the asset price goes down. The trader decides that they have made a mistake somewhere, and so they rush to sell their newly acquired cryptocurrency.
If the price reverses back, the trader will be forced to repeat the purchase and selling once again, though in more favourable conditions. But they would pay a double commission for all their operations, which quite probably would eat any and all profit that they’ll make on trading.
Why this happens: Novices are afraid to lose money and therefore take losses too emotionally. They confuse the micro volatility with the beginning of a new trend and constantly flip their positions.
How to avoid this mistake: Switch your chart to a longer period. This way you won’t be distracted by minute fluctuations.
Bill Williams advises you to treat every trade as a lottery ticket purchase. The price of the ticket will be the maximum allowable loss. In other words, continue the trades until you trigger the stop loss.
Miscalculating a stop loss
When setting their stop losses, traders usually keep in mind the most recent market extremes. But prices often break right through extremes and then reverse in the desired direction; and so, traders don’t make a profit because of the wrong choice of stop losses.
Why it happens: Big players push the price by using the trading volumes of private traders. If all beginners decide to buy, the pros will break their stop losses and push the price up. After that, newcomers will buy the asset again and contribute to further price growth.
How to avoid this mistake: When setting stop losses, do not focus on extremes or obvious support and resistance levels.
Trader Barry Burns advises setting stop losses at a level where there is no reason to hold the position anymore. For example, such a situation may arise when the trend loses its strength.
The position is too big
Traders have a rule: risk no more than 2% of your deposit in one transaction. Beginners often interpret it in a way that you may invest only 2% of your money into position (usually it’s about 20$), but it’s not right. Even if there is a strong trend, you just cannot make money on such a deal. For example, if the Bitcoin grows by 5%, the trader’s profit will make a mere $1.
Seeing that, a novice trader inevitably will want to earn more and therefore increase the position size; but if they miscalculate and the deal turns out to be unsuccessful, they will lose most of their funds. Therefore, the trader will hold the position no matter what in the vain hope that the market turns around and the loss turns into profit.
Why this happens: Beginners want to quickly earn a lot of money. They do not follow the 2% rule and lose all their deposit after the few unsuccessful trades.
So what is the real meaning of the 2% rule? It means that you need to put a stop loss in such a way that when triggered, you lose no more than 2% of the deposit. Then you will have money for new trades even after a series of failures.
How to avoid this mistake: Open only positions in which you don’t lose more than 2% of your deposit when triggering stop losses. For example, you can use half of the deposit with a stop-loss at a distance of 4% from the entry point.
Trying to get money back
Novice traders tend to take any loss personally. After a bad deal, they try to get their money back by opening a lot of new positions as well as increasing the size of already existing ones, and overall may act quite unreasonable under the influence of emotions. As a result, they only lose more money.
Why this happens: The trader feels too strongly about losses and willing to take chances instead of carefully calculating their strategy.
How to avoid this: Do not take losses as your personal failing. The market behaviour is always unpredictable. Even the best trading strategies do not guarantee 100% successful deals.
Lack of patience
Beginners often close lucrative deals on the first trend rollback, getting only minimal profit for their efforts.
For example, let’s imagine that when a trader buys a Bitcoin, the price first rises by 5% and shortly after falls by 2%. A beginner, feeling that they’re losing profit and wishing to do something against further losses, sells their asset. But thereafter, the Bitcoin will grow once again; and due to their fear, the novice trader wouldn’t be able to make money on that.
Why this happens: beginners perceive unrealized profit as earned money and its reduction as a loss. They close positions during rollbacks and do not earn on large movements.
How to avoid this mistake: it’s best to remember that prices don’t move in a straight line. There are drawbacks in any trend. To maximize your profit, wait for the beginning of the hysteria and then exit the market together with the big players.
A trader’s earnings do not depend solely on the ability to analyze charts and news. In trading, personal qualities are just as important: you must be calm, patient and calculative.
Even experienced traders are prone to making mistakes. But there are several rules which will help beginners to experience losses rarer:
- Do not enter the market during its growth or fall: wait for a rollback or a temporary flat line.
- Do not close or flip a position after small losses. Instead set in place a stop loss.
- Place your stop losses away from the extremes so that your deals do not get caught in a false break-up.
- Choose the size of the position in such a way that you’d lose no more than 2% of the deposit if the transaction reveals to be unsuccessful.
- Do not try to get your money back: losses are part of doing business.
- Do not be afraid of drawbacks, as 1% drop almost never means the end of the trend.
And remember: in trading, it is important to think things through, but not to feel too much. You can’t worry too much about your losses, so trade only with money that you are ready to lose.