Traders’ mistakes.

Trading is much more complicated than it seems.

Most of the traders, especially beginners, think that trading in the financial markets is easy and simple. However, that’s one of the most common mistakes as the making decision process is tough, the number of factors influencing prices is huge and the analysis depth is multi-level. Why such a mislead comes into newbies’ mind? The problem is in the information which a beginner gets from advertisement materials: “Are you tired of working for somebody else? Quit and start your trading career”. Most brokers say that trading is simple and everybody can learn fast how to become profitable. They promise support, education, analysis - all people need is to start trading. “Do you want to travel and see the world? Come with us and we’ll give you everything”. That sounds like a fairy tale though. Newbies start to imagine themselves on an exotic island with a laptop, producing so much money that huge sacks are needed to put all that cash together.

But if we dug deeper, several questions would be raised. WHo spreads that information? Right, brokers. How can they make money if an inexperienced newbie did not come to them? WHat they teach is just a certain number of the most simple things, just basics. They show how to use the trading terminal and how to make money on historic rates, in the past. What they say is that traders need to click this button to buy when this particular indicator has lines crossed. They show moments when that worked but they avoid situations when that didn’t. This is the depth of knowledge a beginner has to start earning for his place on an exotic island.

Trading has to be comprehended as a profession, actually. A good trader in the financial markets is like a unique specialist in some profession. It’s impossible to become a specialist in one day or even a month. People spend years to gain experience, not everyone is able to become a cosmonaut. The conclusion is that you can’t find freebie in trading.

Enlarging trading volume after a series of winning deals.

That’s like a disease, it hurts but you don’t see it. Most of the traders do not notice that issue. What a trader does after he gets a number of profitable deals? Sure, he increases his trading volume for the next positions as everything goes well, why such a brilliant chance should be wasted? That’s the case. The more frequent a profitable series happens, the more chances are for a losing streak.

Let’s imagine a trader has a system with a 70% probability of having profits. That means that 7 deals out of 10 are closed with a positive result, while 3 deals ended up with losses. So, if you had 6 profitable deals in a row, what is the likelihood of getting a loss in the next deal? It’s huge! If you already had 6 deals, 4 left and 4 of them would be in losses if you take the average percentage. And what happens with the trading volume? It’s increased right before losing positions to happen! And what’s really worse, is that all of the gains made on 6 profitable deals are wasted because of too large trading volume in losing streak.

It has to be completely the opposite. If a trader got a series of profits, it would be reasonable to lower the trading volume as the likelihood of getting losses is nearing. The trading volume has to be enlarged after the series of losses instead.

Intraday trading in both sides.

Beginners usually want to trade intraday in both put and call side, as they think that such a strategy would double up their profits. That’s not right, as such a trading approach could lead to large losses sooner or later, especially in a sideways range. For instance, a trader gets a loss and opens a deal in the opposite direction, hoping for the price to continue the same way movement. But what happens is that the price goes back again and the trader gets double-loss. Actually, the price did not go anywhere, while the trader gets two losing positions in a row, making the same mistakes. This is why it’s not worth trading intraday on both sides.

If the analysis shows that it’s better trading on call options this particular day, and the direction was chosen, then if a loss comes, the trader should stop opening more deals or start seeking entry levels for another position in the same direction as the previous one. Getting a loss is not the end of the day, the market will exist tomorrow and in a year.

The market always bounces.

That’s the most common mistake when traders lose accounts and deposits. They suppose that the market will bounce back every time when there was a strong one-side movement. If there was a strong up/downtrend, then the retracement will come immediately and that will be a chance to make money on corrections. But the problem is that strong trends might not have any retracements at all.

The majority of traders know that the markets move like waves and there are 4 types of waves:

A price has gone upwards too far, then comes a short-term retracement and the uptrend continues.
The price edged up and continued after an insignificant bounce.
The price soared and continued going north after a short-term consolidation.
The price has gone up sharply, reversed, and then went back down.

The most dangerous types of eaves are number 2 and 3 as they are continuous and can moving in the same direction throughout several days in a row. For example, EUR/USD edged up 1% on Monday, a couple of traders bought put options, hoping for a bounce. But the price moved up another 1% on Tuesday without any retracement. New traders want to enter the market as the price moves for two days without any corrections. Old traders add more volume to short positions, hoping for the price to come back down but that does not happen. The currency pair grows for another 1% on the third day of the action, newest people are getting involved in the wrong side of the market, newest positions are getting deep under the water, while the first traders blow up their accounts.

Retracements traditionally happen and most of the strong trends require healthy correction to continue moving in the main direction. But the depth of such retracements is always different, as well as the time when they occur. If something crucial happened on the fundamental side of things, then traders would be affected by the psychological reaction and nobody would pay attention to the technical analysis. So, trading against a strong trend just because there has to be a certain retracement, is extremely dangerous.

Physics laws do not work in the financial markets.

One of the most common traders’ mistakes is that they assume that the market has to move up or down. Most people know from school that an object could fly up if throw it, and it can drop down if you let it go. But an object cannot hang in the air. It can in the financial markets.

Most of the traders already had such a situation when they open a deal to buy call options for an asset, its price has gone down, creating a loss to that trader. And it reversed and went back exactly to the same initial levels after that. So the trader might avoid that loss as the price did not really change. Some traders noted that a price moves within a trend in only 30% cases, while the other 70% cases suggest sideways trading without any clear direction. So if you think that the price has to go up or down every time you enter the market, you will be getting stop-losses.

Of course, it’s impossible to foresee an exact moment when a strong trend starts but losses could be limited if some filters would be imposed. Those filters have to be found with the experience, but everything is on the chart. All you need is just research historical charts on different timeframes and try to understand reasons which caused this or that particular price action in the past. Some traders use the moment of day close as the stop-loss order. They do have enough control to cut possible losses manually by the market price if the day closes in the wrong side of things.

Intraday trading is not always profitable.

Many think that intraday trading can bring profits every single day but that’s wrong. More or less profitable signals occur on longer timeframes, and they might point to a strong movement. But larger timeframes (one-hour and up) signals require time to be formed, while short-term periods (5 minutes for example) have too frequent signals looking like a game to guess.

There might be an analogy with the summer season. The average daily temperature is +27 celsius but that does not mean that all days will be hot. There might be hot, chilly and rainy days. Trading is same, it's impossible to have 100% profitable days, sometimes all of the financial markets are getting stuck in a tight range without going anywhere.

Borrowing capital for trading.

Sometimes it feels like if a trader had a larger trading capital, then he would make much more money by trading. Taking loans for trading makes traders nervous as interest yield has to be paid for those borrowings. Trading in stress conditions never has a positive outcome, mistakes and losses will happen. It’s tough to find a real story when someone made good money after borrowing the trading capital, while there are lots of stories when traders lost all of the funds. If you’re really profitable, then you do not need credit as your modest deposit will soon become much larger.

I can always make a couple of pips.

Sometimes beginners ask themselves a simple question: ‘Why should I wait for a strong and long-term trend as the market is not giving such a chance every day? Why would not I just take 5-10 pips every day?’ If you multiply 10 pips by 22 working days, you’ll get an amount of 220 pips per month. So, you don’t need to stick to the trading terminal throughout the whole day. But statistics can’t be fooled. You can take 5-10 pips every day for a long while but even the lowest probability could happen one day and the trading account will dive deep under the water.

The main idea of trading for a small number of pips is that a trader does not put stop-loss orders, risking too much to get a small amount of profit. The risk/profit ratio is huge in this case and the market might go deeply against the current trading position. As a result, the loss will overshadow all of the profits received earlier. Well, this strategy has a reasonable approach but the risk/profit ration has to be lowered significantly. Targets have to be much larger, while acceptable losses have to be lowered.

Deals off the trading system.

Possibly every trader used to punish himself for a too early exit from the market before the spike of the price. For instance, a beginner opened a position in the right direction but scared a sudden rebound of the price, and closed the deal right before the huge spike of the price. There is a lot of noise in the financial markets and it’s not worth paying attention to every price fluctuation. The main reason for the mistake is that the trader makes a stupid think even if the strategy instruction tells not to do so. A useful tip, in this case, is not to watch quotes all the time. Traders should trust their trading system. If a deal was opened and the maximum loss levels identified, traders can just close the trading terminal and go for a walk or do something else. Deals off the trading system bring additional losses.

‘I’m a star’.

Another trader’s mistake is related to a situation when the self-confidence soars and people start counting themselves as super-traders. Sometimes the market is kind and there are moments when the price action is quite predictable and everything goes well. Such situations are potentially dangerous as traders’ vigilance comes down significantly and traders think they are chosen. Once the market comes into another phase, price conditions change, and traders start losing money if not all of the account as they got used to easy profits in the past. Traders should always be on the alert of catching a star.

Greed.

Most of the traders’ mistakes come out of greed. People want more and more and that story is endless. Traders start entering the market too often, trying to catch all of the price fluctuations, they open deals with too high leverage, do not cut losses and so on. It's important to admit own mistakes, have a break and analyse what happened, why the loss occurred. Traders in the financial markets have to fight their own greed, otherwise, the greed will kill them.