Beginner traders tend to find trading intimidating and worry about making mistakes. But did you know common trading mistakes aren’t specific to beginners? Even seasoned traders make mistakes. The solution to avoiding them lies in developing a structured and disciplined approach to trading, and this blog explains how to do it in 4 steps.
A few of the most common mistakes traders make are…
…the list can go on. Now, the financial markets are unpredictable, but you can try to avoid these (and several other) trading mistakes by following this 4-step plan of action. These steps aren’t foolproof but are a good way to help you develop the habit of making more responsible trading decisions.
Step 1 – Planning what trades to start and when
Contrary to what most people think, placing a potentially successful trade has less to do with luck and more to do with planning your trades in a disciplined manner. Your prediction needs to be thought out and based on fact-based research that includes a survey of market conditions.
Prepare a trading plan that includes analysing current global and economic events and do your research on how markets are responding to them. If you have limited time for research and analysis, use lesser capital to trade 1 or a maximum of 2 markets simultaneously. This trading plan will help you analyse trading opportunities practically and objectively while also discovering which asset is better suited for your risk appetite.
Step 2 – Planning what trades to end and when
Every trader thinks of when to start a trade. Very few know how to analyse when to end it. Traders land up suffering more losses on losing trades in the hope that the market will reverse and the loss will turn into profit. A fundamental and technical exit strategy plan will help you avoid mistakes like emotional and impulsive trading or not cutting a losing trade. Key indicators like resistance and support lines are a fact-based way to understand market sentiment. Information on resistance and support lines can also highlight the range of an asset’s price movement.
When placing trades, use this information to identify the prices at which you will close the trades – either to secure your potential profit or to limit losses if the market reverses. But more importantly, avoid changing your plan so you can handle any trade objectively if it doesn’t go as planned.
Step 3 – Use risk-management features
Trading is a high-risk activity, and the best way to deal with a high-risk situation is to have a safety net even if you’re fully geared up. That safety net is using risk-management features to secure your potential gains and control your losses when the market moves against you.
Suppose you’re the type of trader who diversifies their portfolio with assets from different markets. In that case, you may not be able to monitor all assets’ price movements simultaneously and cut losses in time. In an instance like this, features like take profit and stop loss can help you secure your potential gains or cut losses before they become too much, especially when market conditions are volatile.
Step 4 – Journal to learn about financial market trends and your trading style
Use a journal to document the events of your trading day. Note down which trades were profitable and which weren’t. Add notes against each of them, mentioning what data you based your prediction on and any insights or past learnings that impacted your decision-making process.
Apart from helping you stay objective, this journal will be useful in understanding how markets respond to various global and economic events and discover what kind of a trader you are. In the long run, you will learn to avoid trading mistakes, sharpen your trading skills, and develop a trading plan that suits your trading style.
The above 4 steps can help beginner and seasoned traders refine their trading skills through constant learning, practise, and discipline.
However, if you are unsure which market to trade, how to use risk-management features, or want to test a trading strategy, practise risk-free with a demo account, which is preloaded with virtual funds. Sign up today so you can try out these steps.