Four common mistakes made by beginners part 1

As a trader, success comes from two things: making big profits and avoiding costly mistakes.

Many a portfolio has been ruined by just a small number of really bad trades.

We will now look at four of the most common and costly mistakes made by forex traders – both

new and old.

1. Failing to cut your losses

It’s a cliché, but “cut your losses” will always be the central rule for effective money

management.

The problem is that human nature is programmed to seek pleasure and avoid pain. It’s a survival

mechanism that keeps our species from extinction.

In terms of financial markets, profits give us pleasure and losses give us pain.

That means that we “naturally” avoid taking losses. No one enjoys taking a loss. No one likes

admitting they are wrong.

But the truth is a big loss can quickly undo months or years of your hard work.

The world’s best traders know that to succeed at trading, you have to overcome your natural

tendency to avoid taking a loss. That doesn’t mean you have to like them, but you have to

accept them.

Paul Tudor Jones is one of the world’s most successful hedge fund managers. He’s been trading

for 35 years and Forbes lists his wealth at over $3 billion, so he knows a thing or two about

making money from trading the markets. Here’s what he has to say on the subject:

“If I have positions going against me, I get right out; if they are going for me, I keep them... Risk

control is the most important thing in trading. If you have a losing position that is making you

uncomfortable, the solution is very simple: Get out, because you can always get back in.”

There’s a simple way to avoid this mistake: Place a stop every time you make a trade.

2. Adding to a losing trade

Adding to a losing trade or “averaging down” as it’s sometimes called, is equivalent to not

admitting your mistakes.

As we’ve discussed earlier, successful traders are brave enough to cut their losses. Adding to a

losing trade is doing the exact opposite of this (throwing fuel on the fire).

Sure, sometimes a trade might hit your stop-loss and then turn around and go back up. That can

be very frustrating, but that doesn’t mean you should abandon money management.

Adding to a losing trade effectively ties up more and more of your money in the trades that

aren’t working. It’s putting added pressure on the weakest part of your portfolio. This could back

Faraday

Research

10

 

you into a corner, shutting you off from reason or clear thinking. Your trading will become

paralysed by emotion rather than logic.

Adding to a losing trade is the most direct road to ruin that we know of.