In the trading process, novice traders can make various mistakes.

All mistakes can be conditionally divided into 3 separate groups:

• Those related to the trading system, its application, and construction.
• Those related to capital management.
• Those related to psychology.

Trading System Mistakes

Starting Without Tests

The first mistake is that the trading method, by which deals are concluded, does not undergo comprehensive testing.

To judge the profitability of a trading method more accurately, it is necessary to carry out comprehensive testing of the trading system. This can be done using special programs capable of testing based on historical data.

In addition, you can look at the chart in the trading platform and record the optimal moments of sale and purchase according to your trading method. After you have more than 200 virtual transaction data, statistics will appear, with which you can determine the main characteristics of the trading system:

• Loss or profit;
• Yield for the test period;
• The number of losing or profitable trades;
• The maximum drawdown by strategy.

The system is better not to use if it cannot make a profit on such historical testing. At this stage, many system options that do not work are screened out. A common fatal mistake of a trader is that he begins to use a trading system that he likes but does not conduct a detailed historical test on it.

Wrong Tool

The next type of mistake is the wrong choice of trading instrument. Almost all trading systems are oriented towards liquid securities. If you apply a system to a security that does not have high liquidity, you can suffer greatly. This means that at the start of activity in the stock market, preference should be given to securities with high liquidity. Securities with low liquidity will only be of interest to those who use specific trading systems for them.

Deviation from the Trading Plan

Often the rules of the system are simply not followed. Trading without a system gives worse results than even an ill-considered trading system with quality and disciplined application.

Mistakes with Capital Management

Another group of mistakes is related to capital management.

Increasing Volumes

In this group, the most common mistake is a substantial exceeding of a reasonable leverage. Usually, it happens like this. At the start of their trading career, many market participants adhere to the rules of capital management and do not plan to exceed the allowable trading leverage. But after a few successful deals, the rules of capital management cease to be observed, and leverage is used to the maximum. Often, this is the reason for poor results.

Incorrect ‘Stops’

Also, many mistakes are related to the fact that a trader erroneously sets stop orders. Of course, it’s bad that there is no mathematically accurate method for setting stop orders. The trader has to compromise when making a decision on the ‘stop’. A stop order too close to the current quote (short) often leads to the position being closed by a random market movement. And with a stop order too far from the current quote (long), there is infrequent triggering, but a large loss for the trader.

Therefore, when setting a ‘stop’, a trader must choose between a lower probability of stop orders triggering with a high potential risk or a higher probability of random triggering with a low risk per trade. Most often, stop orders are set behind the nearest price minimum or maximum. This approach helps effectively minimize the likelihood of random triggering.

Averaging

A common mistake is also averaging. Many traders, after opening a position that incurs a loss, try to open the same position after a while and hope to improve the average opening price for these two positions. In some cases, this tactic can be used, but only in such cases when the acceptable level of risk is not exceeded.

If averaging uses credit resources, then such a tactic will be very risky. On the one hand, risk accumulates. On the other hand, the mathematical expectation worsens. If the trend against the position opened earlier holds for a long time, then usually this position ends with the triggering of a margin call (a critical level of losses when the broker closes the trader’s trades).

Mistakes Related to Psychology

Most mistakes are related to human psychology. The paradox is that even if traders know about psychological mistakes, they still continue to make them.

Attempts to Delay Loss

The most dangerous psychological mistake is trying to sit out a loss.

Often, a trader correctly analyzes the market, opens positions, places orders, and then sees the price approaching the stop order. Then they remove or move the ‘stop’ further away. This greatly worsens the statistical parameters because the losses from this only increase. And if the movement against the open position continues for a very long time, it can result in substantial losses. But the peculiarity of human psychology is that it finds “reasonable” reasons for moving the stop each time.

Many people want to postpone an unfavorable outcome in all areas of life. The time when a stop order is triggered is always unpleasant. Many traders, in this case, expect the price to turn around. Indeed, the price can often turn around, and the position becomes profitable. But sometime, the market will not turn around, and the loss can be huge. Typically, the reluctance to fix losses is the reason for losing significant sums of money.

Premature Closure

Another type of psychological error is the premature fixing of profits. This most often happens when, after opening a position, the market moves, bringing quick small profits. Many traders don’t wait for the planned profit and fix the one obtained. If you always fix a small profit, you will lower the mathematical expectation. If this method is used systematically, it will negatively affect profitability. This mistake is often made by those who do not have enough patience or are afraid of losses.

This type of mistake is not as dangerous as the reluctance to fix losses, but it still should not be repeated often.

Following Short Movements

The next type of psychological mistakes is often suffered by choleric people. This mistake mainly happens during periods of rapid price changes. Beginners in this situation try to open positions in the direction of the price movement, neglecting the rules of capital management. Positions are often opened in the direction of the market movement, as these people get a magnetic impact from the chart. Such a mistake usually does not lead to catastrophic consequences, but if repeated often, it can disrupt the trading system and ultimately result in losses.

Systematics and Trader’s Journal

Having your own trading system is a universal remedy for all trading mistakes. It’s not always easy, as there are times when a trader has to wait for an opportune time to open positions. But even a not very successful trading system, when applied over a long period and with discipline, brings more profit than trading without a system.

Psychological errors stand out because of the traders’ own desire to make them. But the more a person knows about these mistakes and their causes, the easier it will be for them to avoid greed and fear in the future. Keeping a sort of trader’s journal is very important for trading on the exchange.

When a person starts using a trading system, they usually have a rough idea of its result. To have the opportunity to improve their own trading and increase profitability, they need to record all their actions. But it’s not only the moments when trades are made that should be noted. It’s necessary to indicate the reason for the decision to open a position, why the ‘stop’ is set in the chosen place, and why profit was fixed at a particular moment in time.

The aforementioned journal will help to analyze and improve trading.

The best way to avoid trading mistakes is to consistently and clearly follow your own trading system.