5 rookie trading mistakes you won’t make twice

The October half-term week is a time for the Rose family tradition of dragging the kids around some vaguely educational venue in the pouring rain. This year, it was the Tower of London, which involved us catching medieval-style chest infections while standing in the drizzle for an hour, waiting to be filed slowly past the Crown Jewels.

This is the stuff that family memories are made of!

The most exciting part of the day was when my 6-year-old felt the strong arm of a Beefeater on his shoulder as he absent-mindedly strolled out of the gift shop clutching an enormous (unpaid-for) gold chocolate coin. After a day of stories about heads being chopped off and children murdered in the Bloody Tower, he went white with fear.

I don’t think he’ll make that mistake again.

(In fact, he looked so terrified that the Beefeater took pity on him and let him keep the chocolate!)

In trading, there are those niggling trade mistakes that we make again and again … the ones where emotions get the better of us … or we didn’t stick to our plan … or we didn’t follow proper money-management rules …

And there are the trade mistakes that – I hope – we learn quickly not to repeat …

#1 – Getting your stops wrong

While we all get our stop levels hit some of the time (stop losses that never get hit aren’t really protecting us at all!) – sometimes we make mistakes and put our stops in the wrong place – where they are very vulnerable to attack from the markets.

A badly placed stop can cause us to be stopped out too early, failing to capture the profit available.

One of the main rookie errors is to place stops according to a set percentage, such as 2 per cent or a set risk, like 20 points.

Many traders are given incorrect advice about this – and there are plenty of trading strategies out there that give fixed distances from entry to stop for simplicity’s sake. It means that with a newbie trader, you don’t have to explain how to find a sensible place to put your stop.

If a strategy has enough of an edge, this kind of method can work. But it’s really not the best way to place stops – we can do a lot better than this.

We should place stops according to what the market is telling us, not what our personal profit goals are. The market really doesn’t give a damn about us! Look for areas of support or resistance, and put a stop level on the far side of this – where it’s safely tucked out of harm’s way.

Then – and only then – look at your risk. Adjust your stake levels according to where you’ve put your stop level.

If you’re risking £200 on a trade, and your stop is 25 pips away, then your stake will be £8 per pip. However, if on your next trade you’ve put your stop 31 pips away, your stake will now be £6.50

If there’s no sensible place to put a stop at a distance where you’re happy with the risk being taken – then the answer is that this trade isn’t for you. Sit out.

#2 – Ignoring reversal signals

Okay, imagine you’re in a buy trade. All’s going well, you’re in profit and moving nicely towards your target.

Then, your trading strategy gives you a signal to sell.

What do you do? Ignore it, because this trade was going so nicely?

Most of us have done this. And most of us have made a profit at times by doing this.

But that doesn’t mean we were right to do it. If you believe in your trading strategy, then we should have faith in a signal tell you when the market is reversing. Yes, you may have had success in the past by ignoring signals and letting a trade run, but in the end, this will work against you.

#3 – Failing to understand your risk-reward ratio

Many traders do not calculate the risk-reward ratio before they establish a position. (Others become so fixated with risk-reward that they fail to see the right places for their stop levels and profit targets – see Rookie Mistake #1.)

Trading is all about playing probabilities against each other. You’ll never win every trade, so you need to make sure that you win enough on a winning trade (and often enough) to more than make up for what you lose on your losing trades.

One of the key ways to ensure this is to look at how much you’re having to risk for each potential reward you’re going for.

Many traders will tell you that you must go for a 2:1 risk-reward ratio (i.e. you must always aim to make twice what you’re risking). While this is an admirable thing to aim for, in reality, it’s incredibly hard to find 2:1 opportunities. And you’re likely to lose a lot of trades if this is what you insist on chasing.

Risk and reward should always be balanced against your success rate. Monitor both of these to ensure you’re achieving an edge over the market.

4# – Trading against the trend

This is another one where traders just get given bad advice.

Again and again we hear that we should “buy low / sell high” – which leads rookie traders grovelling around the bargain bucket for some unnoticed gem, that no other investor has realised is about to become the next big thing.

Really?

Do you really believe that as a newbie, you’re going to discover the next big thing? And that no other trader has worked out the value of it?

Stop trying to buy at the bottom, and instead look for things that are moving upwards. And concentrate on NOT buying at the top. Make sure there’s still potential.

Likewise, don’t try to wait for the end of a move to exit a trade. If you do, you’re likely to miss the top and be scrabbling for a sale on the way down! Don’t get too greedy – decide on a profit level that you believe is achievable based on the market.

#5 – Sitting on a loss

Okay, this is a big, bad one. Yet, most of us have done it at some point.

Losing positions are something to deal with quickly, close out the trade, and move on …

However, just as an unopened credit card bill sitting on the doormat feels less real than an open one in your hand … an open trade with a big loss isn’t yet realised in your account balance. We can stick our fingers in our ears, sing “la, la, la” and pretend it isn’t really there!

And of course, the hopeless optimist in us believes that the market will come good, and this trade will move into profit eventually. Yes, it probably will at some point, but before that, it’s likely to wipe out your trading account! Get real – close out losses quickly, and if there’s some open loss that you’ve tried to sweep under the doormat – get it out and close it fast!

So, which are the trading mistakes you’ve made that give you a knot in the stomach just remembering them?

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