It is third article from series: “Trader Road”. Click here if you wanna read first “I want to be a trader, best at once“. Today I will talk about the worst mistakes beginner traders make. At the beginning of session I often hear such a question: “Tomek, what companies today will be played?” This question sweeps me off the feet 😉 It isn’t so simple, that before the session I know what I’m going to play. Every day, I prepare myself for the session (I wrote about it in a few articles on the site). However, it isn’t said that any company from listed every day in “Companies on the radar” will be played by me. Traded companies result from preparation for the session and filters, which I use to search the market.
This article is a part of cycle: Trader Road:
However, before I brought into effect a determined schedule and preparations for session –> I went through different moments of development (which farther last), I made a lot of mistakes. These mistakes caused that trading became better, stable, and I can more quickly adapt to changes in the market. A few of these mistakes you are able to pass on the road of your development. Some of them you’ll have to experience on own – thanks to that the market will teach you humility, you will be a better trader or it will turn out that trading isn’t simply for you.
Trading isn’t a field, which you are able to learn using operating manual 🙂 therefore it is learning through mistakes, their analysis and work on the strategy and yourself. I will mention mistakes in the article, which for a long time I observe among traders with whom I cooperate, as well as amongst own mistakes, which still from time to time I make.
A few words to start
I would start from dividing beginners into a few groups:
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Persons totally novice
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Novice persons, but from these series that already know everything 🙂
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Persons with experience (but whether with results?) from other markets
Persons totally novice, as they say, are as an open book – they work from scratch, don’t have a strategy; they are on a path of seeking “what and how”. So far the largest percentage of persons, with whom I cooperate, who started fulfilling in trading, belonged exactly to this group. Their motivation to work is great.
Persons from the second group – are novice, but they know already everything. Probably it’s the most numerous group, all at the same the most difficult. Ambition and self–confidence is at such a level that the level of ego doesn’t allow them to understand: that somebody else can succeed, can have a worse education, not has to be a walking encyclopedia. Additionally, they know everything, even when they don’t – that is typical tub-thumpers 🙂
The last group – are persons with experience, but from other markets. I focus in the entire series on stock markets from the USA. I know that persons with experience on the joint-stock markets e.g. Warsaw Stock Exchange or FOREX, not necessarily were able to transfer the same play strategy to stock exchanges in the United States. It is a similar group to the first one, with a difference that not always it is possible to transfer play strategy/habits from other stock exchanges. Therefore, I despite the fact that in the United States is going well, I don’t try to play on Forex or Warsaw Stock Exchange – because I know that I’m not able to transfer this strategy on other market (unless it will be similar – like e.g. Euronext).
Why I make such a division? I think that every reading should answer oneself a question, to which group belongs. If you choose number 2, I would like to be wrong, but probably you won’t draw anything from what I write farther. It’s like with people who although are young it would result that went through everything in their life and know everything the best. We will agree that when you aren’t able to understand that the problem lies in you, rather than all around, you won’t accomplish too much. It is really a very important thing – to be able critically look at each other, listen to others. Advice from somebody more experienced, having results, it is a really great thing. Alone I talk a lot with other players – particularly in more difficult periods. And I’m not ashamed of it – I’m able to admit in front of myself, and also in front of other player “Yes I have a worse period now, but I work above myself and refine strategy up to changes on the market”. Exchange of observations and experience concerning stress, emotion or other psychological aspects is a valuable matter.
In above groups I didn’t concentrate on players with experience and results. They have already developed style, own strategy. However, I invite them to comment this article on the forum – write what mistakes you made on your road.
Well, let start….
Mistakes Beginner Traders Make
When you will already decide to try on US Stock Markets, the first question that pops up is – on what to play here (someone pointed out that “to play on the market” doesn’t sound professionally. Ok, but whether fact that I would write “to invest” will cause that anybody will achieve better results? No).
Repetitive thing in beginners without experience is:
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Choice of difficult companies to trade
Which in my opinion are difficult companies: the ones most played as GOOG, C, BAC, AAPL, FB, LNKD, TSLA or recently TWTR. It’s what you hear in the media, but I don’t know any daytrader, in the circle of traders, who would trade on them. From those traders, who steadily earn and live from trading. I omit occasional transactions, when something different from the norm occurs on them. But to play there as daytrading, every day – no… However, I know people who from these companies started, and at the same time on these companies end. They tormented them, they played every day on the same symbols – even though on them nothing unusual happened.
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Choice of expensive companies
More expensive companies, have a greater changeability – when we measure in the number of cents, dollars changes. The part due to this reason tries to play on expensive companies, because there is a greater potential of earning. Greater theoretically – in fact, the beginners who start on expensive companies when the rate goes in their direction. However, you cannot close the position at a level of Stop Loss.
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Choice of companies with a wide spread
With expensive companies goes hand in hand an additional aspect – spread which is on these companies. When you open the position of 1000 shares after the market at spread of 1 cent you lose 10$ at the start. When you do the same on a company with spread of 30 cents, you lose 300$ at the start. It’s not necessary to add anything more
Profit potential on cheaper companies with smaller spread is great, and certainly a lot more safe and good to learn for novice players. Remember, trading takes time. To more expensive, more difficult companies – a time will come. And maybe you will find your niche until then, where you will find enough fulfilment to forget about the existence of expensive companies 🙂
Trading what other trade
I very often come across this situation. Trading on what other player sends you. The problem most often regards young traders, who have sessions on which they aren’t able to cope.
Boredom – when on the market happens less, also causes that the player will searching for companies by force. Just to have open position. It is such an addiction to constantly have open positions.
I have my group of trader friends on skąpe. During the session it happens that we talk, we sometimes exchange observations of companies. But providing only the symbols by other trader doesn’t affect that I start at once to trade on it. I must analyze the company, if it interests me in terms of my strategy – only then I can trade on it.
That what’s good for one trader, not necessarily makes sense for someone else.
Lack of patience
It is possible to refer it to all businesses. Very often the beginner trader would like already now to achieve success. It requires time and to build capital. Patience also applies to individual transactions. If you have your strategy, you must hold to it: wait to build appropriate setup for the entry; don’t try to forestall the changes (with a thought that you will be in front of other or being afraid that the changes will flee).
I will present a simple example. Trader waits for break through above 25.50$. These are very strong resistance, which abortively were tested for some time. When the rate comes to 25.50$ the trader decides to open long, so just in case the company didn’t “escaped”. The rate comes to 25.50$, however also at this time the resistance turns out to be too strong and company with a dynamic change drops by 50 cents. Trader wanted to forestall the changes.
The second example is a play e.g. under short. I would like to take the short under the price of 19.99$, on company that grows in a given session from 19.00 to 19.80$. At a price of 20.00$ I can see a huge sale order, so I try to play a cent lower on the short. However, the patience doesn’t allow to wait for change up to 19.99$, instead of it the trader opens short position of 10 cents lower at price of 19.89$. Usually in such case when the rate finally reaches the highly anticipated level of 19.99, the trader will close his short position with a loss. Instead of just at this point to open it, according to assumptions.
Discipline and principles
Every professional athlete, in order to achieve success, cares not only for the physical, sports development. He also cares of all other aspects, including among others appropriate diet. It isn’t easy to keep it, when around so many temptations. However, a disciplined athlete who clearly set oneself an objective and principles by which is guided – can cope it. The same applies to trading – discipline, following precisely designated principles is essential.
Believe me, despite the fact that I play for so many years – I have all my principles listed on a sheet of paper. I always read them before opening a session. I think that it is very important. When results are better, the trader usually falls into complacency. When there are worse transactions, sometimes he forgets about principles to which should hold to.
There is also an additional psychological aspect: if you have in front, by monitors a sheet with principles written down, and you will break them –> you should be shame before yourself. Because when you know principles, you have rules, what’s in front of your eyes, and you still break them – you won’t go far.
Regretting trades
You never know, whether the company after breaking through on a given day will reach 10 cents, 50 cents or 10 dollars of change. It is good when your strategy is focused on implementation of established changes or possibly acts with trailing stop. However experiencing, dwelling what would be if, what could happen, how much I could earn if I held the position – generally speaking what’s the point?
Once in a while I also say “I had so good short”. One word in this sentence is important “I had”, so no longer I have 🙂 Such a thing should only be used to analyze the last entry/exit from the position, so that in the next transaction managed to reap more.
However there are situations that I can hear from trader friends: I had this company with this price, if I held 10 minutes longer there would be more profit 🙂 In my opinion such digressions are only a waste of time.
It is better to concentrate on other possibilities and to search for good entries.
Self-confidence and its lack
Successful transactions boost up the confidence. Failed cause lack of self-confidences, possibility to take rapid, and what this involves unconsidered decisions.
Often series of bad transactions in beginners causes that next transactions are opened with larger number of shares. Because it is necessary to make up for losses, isn’t it. And what’s more will come off: once, twice, three time, but one day the trader will lose and will zero his account.
Keeping loss positions, beyond the level of established stop loss
Continuation of above paragraph… When the trader constantly moves his stop loss, losing more and more, starts to focus only on loss position. And thus lose important minutes or hours during which long ago could accomplish several profitable trades.
However, by observing his transactions, he loses other chances which flee. They flee because can’t see them, he doesn’t know about them 🙂 in the end, he was so busy observing the position above his stop loss, position which brings him a greater loss than established in the strategy.
Trading under emotions
Emotions in trading are and always will be. The question is how they will affect your trading and perception of what is happening. Observing my changes in this approach, as well as others for years, I can see repeated schemes. And it ends in three ways:
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You play farther, because emotions don’t affect your trading. You earnings are stable.
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You play farther; emotions affect your trading in a moderate degree. You earn, but long way to stability.
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You play farther, provided constant new deposits. Trading under emotions cause that when you lose you don’t think sensibly, but start doing nonsenses.
Analyze your behaviors:
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How unsuccessful transactions affect another opened by you?
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How do you behave after series of profitable transactions?
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Can you dissociate from trading, to rest from it?
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Do emotions affect your relations with other persons (traders, family, etc.)?
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Whether success of others cause envy at you?
These are just a few of questions, however alone you will see how emotions will affect your behavior, and which rules most common you’ll break at the beginning.
Be a professional in every aspect
Do you want to be a professional trader? Do you want to earn on the stock-market? You must be professional in what you are doing. Going to work, you focus on entrusted task. Mostly, when you work in the company – during working hours you shouldn’t use (or too much ;)) of private mobile phone, to sit all the time on mail, Facebook, MSN, etc. You should concentrate on performed task.
The same applies to trading – other matters shouldn’t distract you, matters which aren’t urgent, and may cause your absent-mindedness. Lack of concentration may cause missed planned entry, and sometimes it cause that you open the position after a time when it is no longer so attractive.
I hope that this article will help you avoid mistakes, which can be avoided. It is necessary to experience it all on own skin.
This article is a part of cycle: Trader Road:
