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The Top 10 Mistakes Traders Make and How To Avoid Them

Achieving success in trading requires avoiding numerous pitfalls as much, or more, than it does seeking out and executing winning trades. In fact, most professional traders will tell you that it’s not any specific trading methodologies that make traders successful, but instead it’s the overall rules to which those traders strictly adhere that keep them "in the game" long enough to achieve success. Following are 10 of the more prevalent mistakes traders make.

This list is in no particular order of importance.

1. Failure to have a trading plan in place before a trade is executed.
A trader with no specific plan of action in place upon entry into a trade does not know, among other things, when or where he or she will exit the trade, or about how much money may be made or lost. Traders with no pre-determined trading plan are flying by the seat of their pants, and that’s usually a recipe for a "crash and burn."

2. Inadequate trading assets or improper money management.
It does not take a fortune to trade the markets with success. Traders with less than $5,000 in their trading accounts can and do trade futures successfully. And, traders with $50,000 or more in their trading accounts can and do lose it all in a heartbeat. Part of trading success boils down to proper money management and not gunning for those highly risky "home-run" type trades that involve too much trading capital at one time.

3. Expectations that are too high, too soon.
Beginning futures traders that expect to quit their "day job" and make a good living trading in their first few years of trading are usually disappointed. You don’t become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance to achieve success in any field of endeavor — and trading is no different. Trading is not the easy, "get-rich-quick" scheme that a few unsavory characters make it out to be.

4. Failure to use protective stops.
Using protective buy stops or sell stops upon entering a trade provide a trader with a good idea of about how much money he or she is risking on that particular trade, should it turn out to be a loser. Protective stops are a good money-management tool, but are not perfect. There are no perfect money-management tools in trading.

5. Lack of "patience" and "discipline."
While these two virtues are over-worked and very often mentioned when determining what unsuccessful traders lack, not many will argue with their merits. Indeed. Don’t trade just for the sake of trading or just because you haven’t traded for a while. Let those very good trading "set-ups" come to you, and then act upon them in a prudent way. The market will do what the market wants to do — and nobody can force the market’s hand.

6. Trading against the trend–or trying to pick tops and bottoms in markets.
It’s human nature to want to buy low and sell high (or sell high and buy low for short-side traders). Unfortunately, that’s not at all a proven means of making profits in futures trading. Top pickers and bottom-pickers usually are trading against the trend, which is a major mistake.

7. Letting losing positions ride too long.
Most successful traders will not sit on a losing position very long at all. They’ll set a tight protective stop, and if it’s hit they’ll take their losses (usually minimal) and then move on to the next potential trading set up. Traders who sit on a losing trade, "hoping" that the market will soon turn around in their favor, are usually doomed.

8. "Over-trading."
Trading too many markets at one time is a mistake — especially if you are racking up losses. If trading losses are piling up, it’s time to cut back on trading, even though there is the temptation to make more trades to recover the recently lost trading assets. It takes keen focus and concentration to be a successful trader. Having "too many irons in the fire" at one time is a mistake.

9. Failure to accept complete responsibility for your own actions.
When you have a losing trade or are in a losing streak, don’t blame your broker or someone else. You are the one who is responsible for your own success or failure in trading. You make the trading decisions. If you feel you are not in firm control of your own trading, then why do you feel that way? You should make immediate changes that put you in firm control of your own trading destiny.

10. Not getting a bigger-picture perspective on a market.
One can look at a daily bar chart and get a shorter-term perspective on a market trend. But a look at the longer-term weekly or monthly chart for that same market can reveal a completely different perspective. It is prudent to examine longer-term charts, for that bigger-picture perspective, when contemplating a trade.

Jim Wyckoff is the editor of the "Jim Wyckoff on the Markets" analytical, educational and trading advisory service. He is also a technical analyst for Dow Jones Newswires, and was formerly the head equities analyst at CapitalistEdge.com.Jim has spent over 20 years involved with the stock, financial and commodity futures markets. He was a financial journalist with the FWN newswire service for many years, including stints as a reporter on the rough-and-tumble commodity futures trading floors in Chicago and New York. As a journalist, Jim covered every futures market traded in the U.S., at one time or another. It didn't him long to realize the successful traders in every market-be it pork bellies, Treasury bonds or stock index futures-had a common thread among them: nearly all relied on technical analysis to give them a trading edge.Not long after Jim started his career in financial journalism, he began studying technical analysis and found it fascinating. By studying chart patterns and other technical indicators, he realized the playing field could be leveled between the "professional insiders" in the markets. His work has been focused on achieving that end ever since.Jim considers himself a "straight-shooter" in the challenging endeavor of futures trading. Like achieving success in any profession, being a successful trader requires hard work, experience and continuing education. There are no short-cuts to easy money. And, Jim promises and provides excellent customer service, including picking up the telephone, himself, when his valued customers ring him.  Feel free to give him a call at +1-319-277-8643

Jim Wyckoff is the editor of the "Jim Wyckoff on the Markets" analytical, educational and trading advisory service. He is also a technical a...

Grey1

Senior member
The most important mistake is to trade without enough software power at your disposal ..

grey 1
 

TWI

Senior member
Perhaps the biggest mistake is to believe you know.
Perhaps the most important thing to realise is that it is just a probability game.
Perhaps the the hardest thing to become comfortable with is that trading is just as much about taking losses as it is about taking profits.
 

schoe

Well-known member
Grey1 said:
The most important mistake is to trade without enough software power at your disposal ..

grey 1

Grey. I was wondering which software you recommend as being important. Nice to see you post on here again.

Regards Schoe.
 

Grey1

Senior member
schoe said:
Grey. I was wondering which software you recommend as being important. Nice to see you post on here again.

Regards Schoe.

Schoe,

The bank I trade on behalf like many other institutions uses proprietary algorithm front end to vhayu vwap engine to both shift and execute large positions as well as identifying arbitrage opportunities on US stocks to minimise the market direction effect .


PS:- I have already explained most techniques in Arb trading using VWAP in my previous posts.. Serious traders can enjoy a wealth of info on this site with simple and practical examples given by myself to develop an automated trading engine similar to the VHAYU engine

look at http://www.vhayu.com/ specially the pair trading sub link

Grey 1
 
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bracke

Experienced member
I think that the dangers of averaging down when long and averaging up when short should be mentioned. The practice appears to be a common error by new traders.

Regards

bracke
 

RUDEBOY

Experienced member
Don't ever think the markets are some kind of 'easy ride', That's No.1. No.2, do you realise what you are up to? Does your wife know the full facts.........i bet she doesn't? No.3, if you are trading for a company........go for it. You'll be a security guard faster than you can wink!
 

jimbo57

Guest
RUDEBOY said:
Don't ever think the markets are some kind of 'easy ride', That's No.1. No.2, do you realise what you are up to? Does your wife know the full facts.........i bet she doesn't? No.3, if you are trading for a company........go for it. You'll be a security guard faster than you can wink!

you have ceratinly excelled in the last 24 hrs. I take it that the rash of verbiage we have heard of late is merely corroboration that all the above have applied and indeed probably still apply to your goodself.

How is the front desk?
 

counter_violent

Legendary member
jimbo57 said:
you have ceratinly excelled in the last 24 hrs. I take it that the rash of verbiage we have heard of late is merely corroboration that all the above have applied and indeed probably still apply to your goodself.

How is the front desk?

You can go beyond replying to it !

I did !

C V
 

dover 121

Newbie
If everybody follows rule 6........do not trade again the trend.......what happens ?
 

cwang

Junior member
bracke said:
I think that the dangers of averaging down when long and averaging up when short should be mentioned. The practice appears to be a common error by new traders.

Regards

bracke

Not just buy new traders. If you look at the top 30 blew up in trading history, from the latest trader magzine, most of them were caused by averaging, or a variation of it.

A guy in japan ended up with 5% copper of the whole word, and earned title of Mr. five percent.
"Rogue Trader" took down a bank
and the list goes on.

This is a common arithmatical mistake we see often:
I'll bet one dollar
If I lose I bet two more
then four more
then eight more
whenever i win, i go back to one dollar bet
"there is no way I will get 30 straight loss"
so all my trade end up winning

If this algorithm is backed by a big bank (i.e. the trader is an employee)
he may end up winning 100% for, say half a year.

However, since trading as a career. everyone will eventually get burned.
 

cwang

Junior member
dover 121 said:
If everybody follows rule 6........do not trade again the trend.......what happens ?

this assumption will never happen.
Jesse Livermore once said "Human nature do not change"
you can always account majority of the trades in the market do not follow rules, and 90% traders end up losing money. Just make sure you are on the other 10% side :)

Another thing you could do is go to any mid-class neighbourhood, and ask around, probably most family do have at least one person trade stocks. ask them how they trade you will be amazed.

Bob: "i buy this stock because it has good news all the time so it's going to the moon, wallstreet also recommend it"
Pete: "this stock has 200 PE so it must be bad and it should only worth 10% of what it's worth, I am shorting it"
Bob and pete will argue with each other for hours

Wait for a year, and they probably both contribute their money to the other 10%
 

Rogueman

Newbie
...and 90% traders end up losing money. Just make sure you are on the other 10% side Another thing you could do is go to any mid-class...

cwang 29-12-2005 07:00:31

Since its a zero-sum game, when 50% of traders lose money, 50% gains too.
 

charliechan

Experienced member
twalker said:
Perhaps the biggest mistake is to believe you know.
Perhaps the most important thing to realise is that it is just a probability game.
Perhaps the the hardest thing to become comfortable with is that trading is just as much about taking losses as it is about taking profits.

id take these 3 over those 10 any day.
 

Directional

Experienced member
Rogueman said:
Since its a zero-sum game, when 50% of traders lose money, 50% gains too.

Only true from the perspective the buy / sell side, one side will win while the other side will lose - but if I buy a future and take a ten point move before exiting, it'd be quite possible for the person on the losing side of my trade to have exited at say a 1pt loss and the next person who took his trade to exit for a point loss, and so on till ten points later I take my profit - the one winner (me) took all the profit from the imaginary ten losers who all lost a point.

A 50:50 zero sum game yes, but if the 10% are taking all the profits from the 90% of people losing a little...
 

charliechan

Experienced member
...or

i may sell at 6. the dude who bought from me sells at 7 for a profit. the market tanks the next hour and i cover at 2.

we both made money