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.
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.
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