The primary trading pitfalls. How you can avoid them

Ted Capwell

How to avoid primary trading pitfalls

Trading on the financial market is associated with high levels of emotional pressure put on traders. This is largely due to the specificities of the market, such as the financial risk, difficulties forecasting the future and so on. Therefore, there are an array of common pitfalls that many traders fall into, especially beginners who have just begun learning about trading on the financial markets.

Due to this gravity of this topic, we decided to dedicate an entire article to this alone. Further on we will cover the most widespread and inconspicuous psychological pitfalls in trading, as well as go into ways to combat them. Being aware of such vulnerabilities at times increases the likelihood that you will successfully make the journey from a beginner to a professional trader.

The primary trading pitfalls. How you can avoid them

Psychological pitfalls in trading

When we asked some successful traders what the secret to trading was, we got a variety of answers. However, they all had one thing in common. Every expert exchange-trader of any kind made sure to emphasize the importance of psychological factors. And professionals agree that 90% of market success is based on how a trader relates to trading. They mean namely their mental state. The trading systems used, the indicators, the methods of managing capital and so on are all secondary. Therefore, we begin this article by considering the most wide-spread psychological pitfalls. For starters, we will list them, then go on to consider each of them individually.

• Paying too close attention to the chart and open trades.
• Holding on to losing trades too long in the hopes of market reversals.
• Fixing the profit at an inopportune time in the hopes that the trend continues.
• Trying to recoup lost funds to compensate for the loss of a deposit.
• Leaving the market too soon out of the fear of a profitable trend ending.
• Losing control and treating it like gambling, relying on luck rather than a trading system.

The points listed above have an effect on the trading process itself. The common cause all of this is the inability to keep emotions under control. When traders start to consider things logically and through reason, they accurately evaluate the situation.

However, human intuition is the leading advantage people have over robots. If this wasn’t the case, automated systems would have long replaced traders, as they are completely free of emotions and exclusively act in accordance with their algorithm.
That hasn’t happened, because the famous 20/80 formula is in play. Only 80% of your success is determined by your trading system, the remaining 20% is the intuition of the trader themself, the person (not a robot) trading on the financial market.

As always, the truth is somewhere in the middle. Although it can clearly be said that all experienced traders carefully control their emotions, at the same time they don’t ignore their intuition. If you base 80% of your trading decision on cold calculations and 20% of it on intuition, then you will fall within the range of norms. Conversely, is 80% is emotion and only 20% or less is market analysis conducted through your selected trading system, then you are no longer trading, you are gambling.

Closely monitoring open trades

This mistake is very common among beginners. It goes as follows. A trader opens a trading operation and is literally “glued” to the terminal. They follow every minor price fluctuation and worrying about even short-term price corrections in the “wrong” direction.

There is a general rule that traders should conduct their market analysis before placing trades, not after. Once a trade has been placed, in all honesty, you can close the terminal and go on with your life. This should have no effect on the operation’s results. After entering the market, closely following every slight price fluctuation will only destabilize your mental state.
The idea that this helps “control the situation” is an illusion. It is very easy to avoid this pitfall, there is no point excessively concentrating on the market as it won’t sway the final result.

That being said, there are several nuances. When trading with fixed (Buy/Sell) contracts, there is no point opening the trading terminal at all as many platforms won’t allow you to close trades prematurely. For example, on most platforms, you can’t close classic or turbo contracts prior to their expiration. That being said, you can when CFD trading. Contracts based on price difference run on the principle that, as do Forex trades. Therefore, if you trade on a specialized CFD platform, then you need to follow the market so as to fix the profit or limit the loss in time.

Retaining losing operations and closing trades early

To clarify, this is applicable only when trading with contracts that have open expirations, meaning that trades can be closed at any point (for example CFD or Forex). The essence of this pitfall hinges on the common feeling of intense fear of losing money. In the first case, the trader runs a losing trade too long. The market moved in the “wrong” direction, however, the trade remains open in the hopes that soon the trend will reverse and recover the losses.

The situation is reversed when the price is fixed too early. When a trade has been successfully placed, however, it is closed prior to the planned point in time, or when a certain amount of profit has accrued. The reason for this is again due to the trader monitoring the trading terminal too closely and, in a moment of fear, they become convinced that there will be a global market reversal, motivating them to close their order.
The way to combat this pitfall is also very simple. You need to clearly outline a plan in advance and strictly adhere to it. Losing operations should be closed either by a stop loss or manually as soon as the predetermined loss has been reached. The situation is reversed with profitable positions, although a trading stop mechanism is typically used, i.e. a flexible stop loss after the position becomes profitable. If the trading platform doesn’t provide automated stops, then it can be done manually. In the latter case, closely monitor the terminal, it isn’t a psychological pitfall when it is necessary for trading successfully.

Gambling and the scramble to win back funds

This more insidious psychological pitfall is the reason that the majority of beginners lose their deposits. The moment you start to leave trading to fate, rather than follow a system (regardless of if you’ve worked it out yourself or it is ready-made), you’ve gone down a direct and swift path to financial loss. Besides, you won’t gain the usual experience from losses that you get when you adhere to a trading system.

Losses are inevitable. “Only someone who does nothing will make no mistakes”. Absolutely every professional has gone through this to achieve success trading on the exchange. In the beginning, it is completely normal. It can be considered as the price of learning. The money could go to an official trading course or to the financial market. In essence, that’s it. In this one case so long as beginners increase their level of experience it is justified.
The most important thing is that the trading system is strictly followed. If the situation has unfolded, it is worth analyzing it. That being said, never in any case whatsoever try to recoup previously lost deposits by increasing your stake in trading investments. Here we would recommend several practical approaches, those being:

• it follows to concentrate on the trading results (+/-), not on the total profit generated;
• measure your profit and loss in percentages, not in any concrete currencies;
• don’t use the Martingale method (doubling investments following losing trades), the focus needs to be on producing a higher percentage of profitable operations than losing;
• it is helpful to set a limit on the total number of trades or losses/profits per trading day, once that point has been reached, immediately stop trading.

Beginners only have to look at the Forex PAMM account statistics to be convinced that losing deposits is a normal occurrence. There are many examples where professionals consistently experience 5-30% deposit loss and still, at the same time, generate a significant profit. This is why if you have a bad trading day, it is worth taking a break and leaving trading to another more profitable time.

That being said, it is recommended that beginners start out on a demo account either way, because in the initial stages, due to a lack of experience, losing money is practically a guarantee. If only because of their inability to properly take advantage of their trading terminal. Some of trading platforms, for example, offers an unlimited demo deposit, around 100 choice strategies, dozens of video courses and easy opportunities to effectively educate yourself. After you’ve achieved strong results on a demo account, you can switch over to a live account. The minimum deposit is only $10 dollars, meaning you don’t need to risk much.

Fatigue, stress, and frustration

Since we’ve gone through common psychological pitfalls in trading, we’ll move on to a more general topic, although no less significant. The problem of fatigue in trading. Trading on the exchange is an intellectual endeavor. The prolonged mental strain from such a high level of emotional stress can quickly lead to a so-called “burnout”.
Such a state is characterized by a general decline in liveliness. In particular, our abilities to do intellectual tasks suffer. It becomes difficult to analyze and make balanced decisions, both of which are necessary to trade successfully.

In the majority of cases, burning out is another common trading pitfall, which is very much better avoided. Therefore, it is important to follow your trading regime, don’t get unnecessarily worked up, and relax when you can. Stress is relatively normal for people, so long as it doesn’t become pathological. Burning out is a relatively serious threat to your regulatory system, even more, decapacitating than your ability to work.
Factors that contribute to frustration:

• becoming a workaholic – You can’t spend 100% of your free time trading, you need to leave time for other important parts of your life;
• chronic sleep deprivation – high levels of stress can lead to insomnia, this is one of the reasons that it is recommended to trade at night;
• a pessimistic outlook – we get what we expect, or rather, we subconsciously fulfill our own prophecies;
• excessively concentrating on past failures – the past should stay in the past, continuing to punish ourselves for past mistakes can won’t lead to anything good.

How traders keep themselves together

I doubt that the well-known advice to get at least 8 hours of sleep a day is news to anyone. It, of course, is true, so there is no point giving any further recommendations. Therefore, let’s jump to considering a question related to trading.

Our main practical advice. It is worth taking trading a bit more “lightly”, although doing so measured and intelligently. The secret to trading coldly and calmly is to psychologically prepare yourself in advance for the worst-case scenario.

In reality, it is a psychological trick to work through difficult emotions necessary for making key decisions. You will see for yourself. Once you start worrying less about possible losses, then these negative scenarios will happen less often than in the reverse situation. It has a common sense explanation, as a calm mind is more capable of generating more accurate forecasts.
Trading is not a game, it is a professional sphere of activity. It is completely realistic to achieve success with it, as a significant number of people know too well after years of earning profit from exchange trades. That being said, nothing worth having is easily obtained. It takes time and effort to learn any profession. If you act carefully and meticulously, then you will surely teach yourself to trade profitably with either minimal loss or completely free from it using a demo account.


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