7 Worst Trading Mistakes That Bigginer Traders Make-Binoption

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Contents

7 Worst Trading Mistakes That Can Make You Bid Farewell To Trading

Trading mistakes usually happen when traders are new in the trading field. There are many types of mistakes traders make, depending on their expertise.

Continuously mistakes can increase your loss, and you will no longer be able to make money from the trading market .

This particular blog is designed for beginners with trading mistakes. Moreover, we will give you a solution to those mistakes. Apart from this, we are also encouraging you to read 7 Tricks at Binary Options trading article, if you want to be a professional options trader.

7 Worst Trading Mistakes That You Need To Avoid

Hey traders!

Here are 7 biggest mistakes that can make you bid goodbye to trade. So be cautious!

Learning Is A Pillar Of Success:

“A little learning is a dangerous thing” this proverb is perfectly applicable to those traders who start to take himself as an enough skilled trader.

When a person thinks in this way, it automatically hinders him from explore or learn something more in every sphere of life.

In the business field, it’s obvious as he starts to underestimate what it takes to be a profitable or successful trader. A novice trader must have to keep studying charts and learning new trading methods as well.

Here, Preparation is the key.

Common Investor and Trader Blunders

Words of Caution for the Novice

Making mistakes is part of the learning process when it comes to trading or investing. Investors are typically involved in longer-term holdings and will trade in stocks, exchange-traded funds, and other securities. Traders generally buy and sell futures and options, hold those positions for shorter periods, and are involved in a greater number of transactions.

While traders and investors use two different types of trading transactions, they often are guilty of making the same types of mistakes. Some mistakes are more harmful to the investor, and others cause more harm to the trader. Both would do well to remember these common blunders and try to avoid them.

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No Trading Plan

Experienced traders get into a trade with a well-defined plan. They know their exact entry and exit points, the amount of capital to invest in the trade and the maximum loss they are willing to take.

Beginner traders may not have a trading plan in place before they commence trading. Even if they have a plan, they may be more prone to stray from the defined plan than would seasoned traders. Novice traders may reverse course altogether. For example, going short after initially buying securities because the share price is declining—only to end up getting whipsawed.

Chasing After Performance

Many investors or traders will select asset classes, strategies, managers, and funds based on a current strong performance. The feeling that “I’m missing out on great returns” has probably led to more bad investment decisions than any other single factor.

If a particular asset class, strategy, or fund has done extremely well for three or four years, we know one thing with certainty: We should have invested three or four years ago. Now, however, the particular cycle that led to this great performance may be nearing its end. The smart money is moving out, and the dumb money is pouring in.

Not Regaining Balance

Rebalancing is the process of returning your portfolio to its target asset allocation as outlined in your investment plan. Rebalancing is difficult because it may force you to sell the asset class that is performing well and buy more of your worst-performing asset class. This contrarian action is very difficult for many novice investors.

However, a portfolio allowed to drift with market returns guarantees that asset classes will be overweighted at market peaks and underweighted at market lows—a formula for poor performance. Rebalance religiously and reap the long-term rewards.

Ignoring Risk Aversion

Do not lose sight of your risk tolerance or your capacity to take on risk. Some investors can’t stomach volatility and the ups and downs associated with the stock market or more speculative trades. Other investors may need secure, regular interest income. These low-risk tolerance investors would be better off investing in the blue-chip stocks of established firms and should stay away from more volatile growth and startup companies shares.

Remember that any investment return comes with a risk. The lowest risk investment available is U.S. Treasury bonds, bills, and notes. From there, various types of investments move up in the risk ladder, and will also offer larger returns to compensate for the higher risk undertaken. If an investment offers very attractive returns, also look at its risk profile and see how much money you could lose if things go wrong. Never invest more than you can afford to lose.

Forgetting Your Time Horizon

Don’t invest without a time horizon in mind. Think about if you will need the funds you are locking up into an investment before entering the trade. Also, determine how long—the time horizon—you have to save up for your retirement, a downpayment on a home, or a college education for your child.

If you are planning to accumulate money to buy a house, that could be more of a medium-term time frame. However, if you are investing to finance a young child’s college education, that is more of a long-term investment. If you are saving for retirement 30 years hence, what the stock market does this year or next shouldn’t be the biggest concern.

Once you understand your horizon, you can find investments that match that profile.

Not Using Stop-Loss Orders

A big sign that you don’t have a trading plan is not using stop-loss orders. Stop orders come in several varieties and can limit losses due to adverse movement in a stock or the market as a whole. These orders will execute automatically once perimeters you set are met.

Tight stop losses generally mean that losses are capped before they become sizeable. However, there is a risk that a stop order on long positions may be implemented at levels below those specified should the security suddenly gap lower—as happened to many investors during the Flash Crash. Even with that thought in mind, the benefits of stop orders far outweigh the risk of stopping out at an unplanned price.

A corollary to this common trading mistake is when a trader cancels a stop order on a losing trade just before it can be triggered because they believe that the price trend will reverse.

Letting Losses Grow

One of the defining characteristics of successful investors and traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, can become paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may hold on to a losing position in the hope that the trade will eventually work out. A losing trade can tie up trading capital for a long time and may result in mounting losses and severe depletion of capital.

Averaging Down or Up

Averaging down on a long position in a blue-chip stock may work for an investor who has a long investment horizon, but it may be fraught with peril for a trader who is trading volatile and riskier securities. Some of the biggest trading losses in history have occurred because a trader kept adding to a losing position, and was eventually forced to cut the entire position when the magnitude of the loss became untenable. Traders also go short more often than conservative investors and tend toward averaging up, because the security is advancing rather than declining. This is an equally risky move that is another common mistake made by a novice trader.

The Importance of Accepting Losses

Far too often investors fail to accept the simple fact that they are human and prone to making mistakes just as the greatest investors do. Whether you made a stock purchase in haste or one of your long-time big earners has suddenly taken a turn for the worse, the best thing you can do is accept it. The worst thing you can do is let your pride take priority over your pocketbook and hold on to a losing investment. Or worse yet, buy more shares of the stock. as it is much cheaper now.

This is a very common mistake, and those who commit it do so by comparing the current share price with the 52-week high of the stock. Many people using this gauge assume that a fallen share price represents a good buy. However, there was a reason behind that drop and price and it is up to you to analyze why the price dropped.

Believing False Buy Signals

Deteriorating fundamentals, the resignation of a chief executive officer (CEO), or increased competition are all possible reasons for a lower stock price. These same reasons also provide good clues to suspect that the stock might not increase anytime soon. A company may be worth less now for fundamental reasons. It is important to always have a critical eye, as a low share price might be a false buy signal.

Avoid buying stocks in the bargain basement. In many instances, there is a strong fundamental reason for a price decline. Do your homework and analyze a stock’s outlook before you invest in it. You want to invest in companies that will experience sustained growth in the future. A company’s future operating performance has nothing to do with the price at which you happened to buy its shares.

Buying With Too Much Margin

Margin—using borrowed money from your broker to purchase securities, usually futures and options. While margin can help you make more money, it can also exaggerate your losses just as much. Make sure you understand how the margin works and when your broker could require you to sell any positions you hold.

The worst thing you can do as a new trader is become carried away with what seems like free money. If you use margin and your investment doesn’t go the way you planned, then you end up with a large debt obligation for nothing. Ask yourself if you would buy stocks with your credit card. Of course, you wouldn’t. Using margin excessively is essentially the same thing, albeit likely at a lower interest rate.

Further, using margin requires you to monitor your positions much more closely. Exaggerated gains and losses that accompany small movements in price can spell disaster. If you don’t have the time or knowledge to keep a close eye on and make decisions about your positions, and their values drop then your brokerage firm will sell your stock to recover any losses you have accrued.

As a new trader use margin sparingly, if at all; and only if you understand all of its aspects and dangers. It can force you to sell all your positions at the bottom, the point at which you should be in the market for the big turnaround.

Running With Leverage

According to a well-known investment cliché, leverage is a double-edged sword because it can boost returns for profitable trades and exacerbate losses on losing trades. Just as you shouldn’t run with scissors, you shouldn’t run to leverage. Beginner traders may get dazzled by the degree of leverage they possess—especially in forex (FX) trading—but may soon discover that excessive leverage can destroy trading capital in a flash. If a leverage ratio of 50:1 is employed—which is not uncommon in retail forex trading—all it takes is a 2% adverse move to wipe out one’s capital. Forex brokers like IG Group must disclose to traders that more than three-quarters of traders lose money because of the complexity of the market and the downside of leverage.

Following the Herd

Another common mistake made by new traders is that they blindly follow the herd; as such, they may either end up paying too much for hot stocks or may initiate short positions in securities that have already plunged and may be on the verge of turning around. While experienced traders follow the dictum of the trend is your friend, they are accustomed to exiting trades when they get too crowded. New traders, however, may stay in a trade long after the smart money has moved out of it. Novice traders may also lack the confidence to take a contrarian approach when required.

Keeping All Your Eggs in One Basket

Diversification is a way to avoid overexposure to any one investment. Having a portfolio made up of multiple investments protects you if one of them loses money. It also helps protect against volatility and extreme price movements in any one investment. Also, when one asset class is underperforming, another asset class may be performing better.

Many studies have proved that most managers and mutual funds underperform their benchmarks. Over the long term, low-cost index funds are typically upper second-quartile performers or better than 65%-to-75% of actively managed funds. Despite all of the evidence in favor of indexing, the desire to invest with active managers remains strong. John Bogle, the founder of Vanguard, says it’s because: “Hope springs eternal. Indexing is sort of dull. It flies in the face of the American way [that] “I can do better.'”

Index all or a large portion (70%-to-80%) of your traditional asset classes. If you can’t resist the excitement of pursuing the next great performer, then set aside about 20%-to-30% of each asset class to allocate to active managers. This may satisfy your desire to pursue outperformance without devastating your portfolio.

Shirking Your Homework

New traders are often guilty of not doing their homework or not conducting adequate research, or due diligence, before initiating a trade. Doing homework is critical because beginning traders do not have the knowledge of seasonal trends, or the timing of data releases, and trading patterns that experienced traders possess. For a new trader, the urgency to make a trade often overwhelms the need for undertaking some research, but this may ultimately result in an expensive lesson.

It is a mistake not to research an investment that interests you. Research helps you understand a financial instrument and know what you are getting into. If you are investing in a stock, for instance, research the company and its business plans. Do not act on the premise that markets are efficient and you can’t make money by identifying good investments. While this is not an easy task, and every other investor has access to the same information as you do, it is possible to identify good investments by doing the research.

Buying Unfounded Tips

Everyone probably makes this mistake at one point or another in their investing career. You may hear your relatives or friends talking about a stock that they heard will get bought out, have killer earnings or soon release a groundbreaking new product. Even if these things are true, they do not necessarily mean that the stock is “the next big thing” and that you should rush into your online brokerage account to place a buy order.

Other unfounded tips come from investment professionals on television and social media who often tout a specific stock as though it’s a must-buy, but really is nothing more than the flavor of the day. These stock tips often don’t pan out and go straight down after you buy them. Remember, buying on media tips is often founded on nothing more than a speculative gamble.

This isn’t to say that you should balk at every stock tip. If one really grabs your attention, the first thing to do is consider the source. The next thing is to do your own homework so that you know what you are buying and why. For example, buying a tech stock with some proprietary technology should be based on whether it’s the right investment for you, not solely on what a mutual fund manager said in a media interview.

Next time you’re tempted to buy based on a hot tip, don’t do so until you’ve got all the facts and are comfortable with the company. Ideally, obtain a second opinion from other investors or unbiased financial advisors.

Watching Too Much Financial TV

There is almost nothing on financial news shows that can help you achieve your goals. There are few newsletters that can provide you with anything of value. Even if there were, how do you identify them in advance?

If anyone really had profitable stock tips, trading advice, or a secret formula to make big bucks, would they blab it on TV or sell it to you for $49 per month? No. They’d keep their mouth shut, make their millions and not need to sell a newsletter to make a living. Solution? Spend less time watching financial shows on TV and reading newsletters. Spend more time creating—and sticking to—your investment plan.

Not Seeing the Big Picture

For a long-term investor, one of the most important but often overlooked things to do is a qualitative analysis or to look at the big picture. Legendary investor and author Peter Lynch once stated that he found the best investments by looking at his children’s toys and the trends they would take on. The brand name is also very valuable. Think about how almost everyone in the world knows Coke; the financial value of the name alone is therefore measured in the billions of dollars. Whether it’s about iPhones or Big Macs, no one can argue against real life.

So pouring over financial statements or attempting to identify buy and sell opportunities with complex technical analysis may work a great deal of the time, but if the world is changing against your company, sooner or later you will lose. After all, a typewriter company in the late 1980s could have outperformed any company in its industry, but once personal computers started to become commonplace, an investor in typewriters of that era would have done well to assess the bigger picture and pivot away.

Assessing a company from a qualitative standpoint is as important as looking at its sales and earnings. Qualitative analysis is a strategy that is one of the easiest and most effective for evaluating a potential investment.

Trading Multiple Markets

Beginning traders may tend to flit from market to market—that is, from stocks to options to currencies to commodity futures, and so on. Trading multiple markets can be a huge distraction and may prevent the novice trader from gaining the experience necessary to excel in one market.

Forgetting About Uncle Sam

Keep in mind the tax consequences before you invest. You will get a tax break on some investments such as municipal bonds. Before you invest, look at what your return will be after adjusting for tax, taking into account the investment, your tax bracket, and your investment time horizon.

Do not pay more than you need to on trading and brokerage fees. By holding on to your investment and not trading frequently, you will save money on broker fees. Also, shop around and find a broker that doesn’t charge excessive fees so you can keep more of the return you generate from your investment. Investopedia has put together a list of the best discount brokers to make your choice of a broker easier.

The Danger of Over-Confidence

Trading is a very demanding occupation, but the “beginner’s luck” experienced by some novice traders may lead them to believe that trading is the proverbial road to quick riches. Such overconfidence is dangerous as it breeds complacency and encourages excessive risk-taking that may culminate in a trading disaster.

From numerous studies, including Burton Malkiel’s 1995 study entitled: “Returns From Investing In Equity Mutual Funds,” we know that most managers will underperform their benchmarks. We also know that there’s no consistent way to select, in advance, those managers that will outperform. We also know that very few individuals can profitably time the market over the long term. So why are so many investors confident of their abilities to time the market and/or select outperforming managers? Fidelity guru Peter Lynch once observed: “There are no market timers in the Forbes 400.”

Inexperienced Day Trading

If you insist on becoming an active trader, think twice before day trading. Day trading can be a dangerous game and should be attempted only by the most seasoned investors. In addition to investment savvy, a successful day trader may gain an advantage with access to special equipment that is less readily available to the average trader. Did you know that the average day-trading workstation (with software) can cost in the tens of thousands of dollars? You’ll also need a sizable amount of trading money to maintain an efficient day-trading strategy.

The need for speed is the main reason you can’t effectively start day trading with the extra $5,000 in your bank account. Online brokers’ systems are not quite fast enough to service the true day trader; literally, pennies per share can make the difference between a profitable and losing trade. Most brokerages recommend that investors take day-trading courses before getting started.

Unless you have the expertise, a platform, and access to speedy order execution, think twice before day trading. If you aren’t very good at dealing with risk and stress, there are much better options for an investor who’s looking to build wealth.

Underestimating Your Abilities

Some investors tend to believe that they can never excel at investing because stock market success is reserved for sophisticated investors only. This perception has no truth at all. While any commission-based mutual fund salesmen will probably tell you otherwise, most professional money managers don’t make the grade either, and the vast majority underperform the broad market. With a little time devoted to learning and research, investors can become well-equipped to control their own portfolios and investing decisions, all while being profitable. Remember, much of investing is sticking to common sense and rationality.

Besides having the potential to become sufficiently skillful, individual investors do not face the liquidity challenges and overhead costs of large institutional investors. Any small investor with a sound investment strategy has just as good a chance of beating the market, if not better than the so-called investment gurus. Don’t assume that you are unable to successfully participate in the financial markets simply because you have a day job.

The Bottom Line

If you have the money to invest and are able to avoid these beginner mistakes, you could make your investments pay off; and getting a good return on your investments could take you closer to your financial goals.

With the stock market’s penchant for producing large gains (and losses), there is no shortage of faulty advice and irrational decision making. As an individual investor, the best thing you can do to pad your portfolio for the long term is to implement a rational investment strategy that you are comfortable with and willing to stick to.

If you are looking to make a big win by betting your money on your gut feelings, try a casino. Take pride in your investment decisions, and in the long run, your portfolio will grow to reflect the soundness of your actions.

Top 7 Mistakes New Traders Make

Entering the world of stock trading is definitely a very exciting time for many people. Most new traders are allured by the potential to make large sums of money in the stock market. This kind of excitement can be a great motivator for new traders, however, it can also cause them to make some hasty, irrational decisions. When people get distracted by the potential for huge gains, they start treating day trading like a lottery. Trading is not a lottery and stocks are not lottery tickets. You should never bet on a “hot stock pick” or go “all in” on a play. Trading is an art that requires training and discipline. Success is possible, but it is a process not an instant gratification. If you want to become a successful day trader, you need to put in the hours and work for it.

I have been running Investors Underground for a long time now and trading for even longer. I often see new traders repeat the same mistakes. I want to help you avoid making these mistakes so that you can have the best shot at success.

Here are the most common mistakes I see new traders make:

1. Going in Unprepared

As mentioned above, trading stocks should not reflect gambling. You are not going to get rich by luck. Sure, a little bit of luck can be helpful, but you should never depend on it. You need to be prepared for the markets. The first step in preparation is education. You need to educate yourself about trading so that you are properly equipped to master the stock market. You need to know how the market works, what kinds of setups you are looking for and why, and how you will react in a trade.

When we have new traders approach us about getting started with trading, we always recommend our DVD’s first. This isn’t solely because we make money off of them because we could just as easily sell a monthly subscription. We recommend that new traders watch the DVDs so that they can come to the market prepared and confident. Going into the market unprepared is very risky and many traders blow up their accounts due to their hastiness. Don’t get taken out of the game that fast. Prepare yourself so you can have the highest chances of success.

2. Lack of Proper Tools

Trading is an art, and just like any craft, it requires the proper tools and resources. Try building a house without a hammer and nails; it’s not gonna happen. If you want to set yourself up for success in the stock market, you need to make sure you have access to the proper tools. These tools may include brokers, trading software, educational resources, and more. Make sure your toolbox is adequately supplied before you embark on your trading journey. You’d be surprised at how valuable a single tool such as a broker or platform can be. Do your research and make sure you have what you need to properly execute your trading plan.

3. Going in Too Big

You will often see many parallels between new traders and gamblers because the stock market and the casino both have a similar appeal. They offer you the opportunity to turn a small sum of money into a much larger one. Most people know that they have very low odds in the casino, however, not many people realize that they have similar odds in the stock market if they take the wrong approach. We’ve already mentioned the significance of preparation – this is the first step to success in the markets. The next step is proper money management.

Money management is just as important as trading strategy because it helps your protect your capital. It also gives you more cushion for losing trades. If you only use 10% of your capital for any trade, you can never blow up your account from a single trade. 10% is an arbitrary number, but you should get the point. If you go in too big on plays, you expose yourself to unnecessary risk. Even a trader with a 90% win rate stands a chance of blowing up their account if they go all in. You wouldn’t go into a casino and put your life savings on red at the roullette table (hopefully), so why would you take unnecessary risks in your trades? Make sure you are never gambling and focus on managing your money properly. Sure, it’s easy to think about the potential gains, but you can’t forget about the potential losses. It may sting a bit to feel like you could have made more on a trade but it will sting significantly harder if you blow up your trading account and take yourself out of the game.

4. Following vs. Learning

When people get started in trading, they often look for a mentor to learn from. There’s nothing wrong with that. In fact, it’s great to learn from the successes and failures of an experienced trader. The problem comes in when you try to replicate their success through mimicry. That’s the problem with a lot of alerts services. They attract traders who simply want to copy the exact trades of a successful trader. You should be focused on becoming self sufficient. When was the last time you heard someone attribute their success to copying a “guru’s” trades? It just doesn’t work like that.

Learn from others, but don’t follow them.

5. Averaging Down

One of the worst mistakes new traders make is averaging down. This is a great way to turn a small loss into an account-ruiner. We’ve all been there before. You’ve already committed to a trade so now you feel like you have to follow through. “The stock was cheap when I bought it at $5, so $4 is a steal!” This logic is flawed and it will get you into trouble. When you average down, you’re adding to a losing position, thus digging yourself deeper in a hole. You’re better off cutting losses early. No one likes to take losses, but taking a small loss is much better than getting yourself in a position where you can be taken out of the trading game. There will be plenty of other trading opportunities if you preserve your capital. Have a trading plan and stick to it.

6. Not Cutting Losses

Not cutting losses is similar to averaging down. It will hold you back and potentially ruin your account. As mentioned before, no one likes taking losses, but it is an important part of the game. Just consider it the cost of doing business. If you hold onto a loser, you expose yourself to unnecessary risk. That $100 loss can easily go to $200, $400, $1000 and beyond. You need to know how much money you are willing to risk on a play and then follow through with it. It’s important to have a maximum dollar amount that you are willing to risk. If you ever lose more than that, you broke your trading rules. Be smart about cutting losses early and you will have a much stronger chance of succeeding in the markets.

7. Vengeance Trading

There’s nothing worse than trying to make up for a bad trade by placing more trades. “I just lost $500 so now I need to find a $500 trade to make it back.” When you do this, you are trading emotionally and that is a recipe for disaster. You should never trade to make up for losses. You should only trade when you have a prime setup and a solid trading plan. If you start feeling like you are trading emotionally, step back and take a breath. You don’t have to keep trading. This can help prevent you from making a poor trade that you will regret in the long run. Remember, there will always be more opportunities to make money if you preserve your capital. Don’t get too anxious.

11 Comments

Nate. You are doing a great job. I don´t know how long will it take for most people to begin speculating with you. Maybe a few months from now, maybe a little longer. Some people like me, simply have to wait for a few things to happen before we sign up. What I do know is that most people will begin speculating eventually and that your efforts, your advertising and things you post, like this one, are priceless. Penny Stocking is going to become big in the near future and the kind of work you and Cam and Profit.ly are doing is ground breaking. Congratulations on your insight and the work you do.

Thanks Nate – I needed this! ��

I just purchased the DVDs. However, Im awaiting the A.D.D version to be released. Man, there is a lot of information on these DVDs!!

I just quit day trading yesterday for some of the exact same reasons listed above. I am not new to trading but some how have lost my discipline. I have had many days in the last two months where I traded perfectly and made decent profits. I would then be happy, close the platform and walk away. But, something (greed) would always leas me back to “just one more trade”. That one more trade more often than not would result in a loss. I then would begin revenge trading (and breaking many rules due to emotional trading) only to find my profits erased and replaced with big losses. Too many times this has happened over the last 2 months. Trading is my income. Walking away from it for a while is scary and hard on my pride but it is best. I have capital to continue trading but what good is capital when it is being put to use improperly. I will return when I have learned to appreciate the lifestyle trading for a living has given me. As motivation to regain my discipline, I am going to work a “job” and reconfirm my dislike for that way of living. By doing this I will make a little capital but mostly I will be humbled and hopefully return to trading with my old discipline so that I never have to have a “job” again. Follow Nates rules and never ever lose discipline. I could care less about the money I’ve lost. I’m more disappointed in myself and don’t look forward to working.

Wow thanks for sharing. It helps to hear from someone who has been there so hopefully I won’t.

Thanks for your story about your misfortune, I mean this in the most respectful way as this is what I will reflect on when I indulge in the learning of this art.
My philosophy is taken from a quote from Eleanor Roosevelt and that is to “learn from the mistakes of others as life is too short to make them all yourself”.
I am new to this and from the misfortune of others I vow too give myself the greatest of effort that is needed to succeed with this so once again thanks very much as this has shown me that it is very real that this can happen and my current attitude towards this means nothing as I am no exception to the failures of this as is the next person so with all respect thank you for sharing this it means the world to this very green newbie.

Nate this is my second month with your service been swing trading for a couple of years and the good thing about swing trading is that I had time to analyze my trades before getting in . This is my second month day trading and was overwhelmed at first trying to follow a bunch of stocks at one time not analyzing and planning my trades I was failing. Started trading one stock at a time may have been one you recommended or may have been one from my scan . I am now able to follow 4 stocks and have a trade plan for each one of them and my brain is focused on those 4 I ignore other alerts . Plan on adding 1 more stock next week and my goal is to follow 6 stock on a daily basis with a trade plan for each. Long story short your service is a great asset as I have learned a lot of trading tips that I didn’t know and learn something on a daily basis keep up the good work and highly recommend your sight.

Dear Dwayne: My name is Roland Sanchez I live on Morgan Hill,Ca. Dwaynne I’m in the same situation like you, my big problem is try to find stocks and be able to get some results, I subscribe in few magazines, but I do not get any luck, you have a very good plan, I make some mistakes, that I try to correct by my self, I’m confuse about trade plan for each stock, and I think this is my mistake, if you have the courtesy of help in this matter I will appreciate very much, my Regards to youu,Dwayne

Hi Roland, I pick my stocks from http://www.finviz.com. It’s on Investors Underground free videos on YouTube. You can choose which exchange you want. Hope it all turns around in your favor��

Great list of trading mistakes.Keep it up.Good job.

I love the advice you share! I am not in the position to take advantage of your program yet, however, do plan to in the future. Investors Underground has so impressed me. I’m just learning about trading and am focusing on learning patience and due diligence. this is more difficult than I realized. There is so much to learn! Thanks again for sharing this!! Bookmarking it now,

10 Avoidable Mistakes Forex Day Traders Make

Your success depends on avoiding these pitfalls

The foreign exchange market (forex) has a low barrier to entry, which makes it one of the world’s most accessible day trading markets. If you have a computer, an internet connection, and a few hundred dollars, you should be able to start day trading.

This easy-entry is not a promise of a quick profit, however. Before you take the plunge, consider these 10 common mistakes you should avoid, as they are the main reasons new forex day traders fail.

If You Keep Losing, Don’t Keep Trading

There are two trading statistics to keep a close eye on: Your win-rate and risk-reward ratio.

Your win-rate is how many trades you win, expressed as a percentage. For example, if you win 60 trades out of 100, your win-rate is 60%. A day trader should work to maintain a win-rate above 50%.

Your reward-risk ratio is how much you win relative to how much you lose on an average trade. If your average losing trades are $50 and your winning trades are $75, your reward-risk ratio is $75/$50=1.5. A ratio of 1 indicates you’re losing as much as you’re winning.

Day traders should keep their reward-risk above 1, and ideally above 1.25. You can still be profitable if your win-rate is a bit lower and your reward-risk is a bit higher, or vice versa. Try to keep it simple though, and develop strategies that win more than 50% of the time and offer a better than 1.25 reward-risk ratio.

Trading Without a Stop Loss

You should have a stop-loss order for every forex day trade you make. A stop-loss is an offsetting order that gets you out of a trade if the price moves against you by an amount you specify.

When you have a stop-loss order on your trades, you have taken a large portion of the risk out that investment. If you start taking losses on a trade, the stop-loss prevents you from losing more than you can handle.

Adding to a Losing Day Trade

Averaging down is adding to your position (the price you purchased the trade at) as the price moves against you, in the mistaken belief that the trend will reverse. Adding to a losing trade is a dangerous practice. The price can move against you for much longer than you expect, as your loss gets exponentially larger.

Instead, take a trade with the proper position size and set a stop-loss on the trade. If the price hits the stop-loss the trade will be closed at a smaller loss than it would have without it. There is no reason to risk more than that.

Risking More Than You Can Afford to Lose

The key part of your risk management strategy is to establish how much of your capital you are willing to risk on each trade. Day traders ideally should risk less than 1% of their capital on any single trade. That means that a stop-loss order closes out a trade if it results in no more than a 1% loss of trading capital.

That means that even if you lose multiple trades in a row only a small amount of your capital will be lost. At the same time, if you make more than 1% on each winning trade your losses are recouped.

Another aspect of risk management is controlling daily losses. Even risking only 1% per trade, you could lose a substantial amount of your capital in a single bad day.

You should set a percentage for the amount you are willing to lose in a day. If you can afford a 3% loss in a day, you should discipline yourself to stop at that point. Day trading can become an addiction if you let it. Only play with the money you have set aside, and stick to your strategy.

Going All In (Trying to Win It All Back)

Even if you have a risk management strategy in place, there will be times you will be tempted to ignore it and take a much larger trade than you normally do. The reasons vary, and you’ll be tempting fate to do her worst.

You might have had several losing trades in a row, which will make you want to earn back some of the losses. A winning streak can make you feel as if you can’t lose. There will always be one trade promising such good returns, you are willing to risk almost everything on it.

If you risk too much you are making a mistake, and mistakes tend to compound. Traders have been known to their stop-loss order in the hopes of a turnaround. Many also get caught up keeping their margin, telling themselves it will turn around and they’ll win big.

When you feel this way, stick to your 1% risk per trade rule and your 3% risk per day rule. Resist temptation, stick to your risk management strategy and avoid going all in or adding to your position.

Trying to Anticipate the News

Many pairs (two stocks—one long, one short, both correlated) rise or fall sharply in the wake of scheduled economic news releases. Anticipating the direction the pair will move, and taking a position before the news comes out, seems like an easy way to make a windfall profit. It isn’t.

Often the price will move in both directions, sharply and quickly, before picking a sustained direction. That means you are just as likely to be in a big losing trade within seconds of the news release as you are to be in a winning trade.

There is another problem. In the initial moments after the release, the spread between the bid and ask price (highest purchase price and lowest sell price) is often much bigger than usual. You may not be able to find the liquidity you need to get out of your position at the price you want (using smaller trades to get out of the position).

Instead of anticipating the direction that news will take the market, have a strategy that gets you into a trade after the news release. You can profit from the volatility without all the unknown risks. The non-farm payrolls forex strategy is an example of this approach.

Choose the Wrong Broker

Depositing money with a forex broker is the biggest trade you will make. If it is poorly managed, in financial trouble, or an outright trading scam, you could lose all your money.

Take time in choosing a broker. There is a five-step process you should go through when deciding on which broker to use. You should consider what you want to accomplish, what a broker offers, and use reliable sources for broker referrals. Then, test the broker using small trades at first, and don’t accept offers of bonuses with their services.

Take Multiple Trades That Are Correlated

You may have heard that diversification is good. Diversification is a strategy that depends on your knowledge, experience, and what you are trading. Warren Buffett once said about diversification:

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

If you believe in diversification you may be inclined to take multiple day trades at the same time instead of just one, thinking you are spreading your risk. Chances are you are actually increasing it.

If you see a similar trade setup in multiple forex pairs, there is a good chance those pairs are correlated. That is why you are seeing the same setup in each one. When pairs are correlated, they move together, which means you will probably win or lose on all those trades. If you lose, you have multiplied your loss by the number of trades you made.

If you take multiple day trades at the same time, make sure they move independently of each other.

Trade Based on Fundamental or Economic Data

It is easy to get caught up in the news of the day or to form a bias based on an article you read that says economic conditions are good or bad for a particular country or currency.

The long-term fundamental outlook is irrelevant when you are day trading. Your only goal is to implement your strategy, no matter which direction it tells you to trade. Bad investments can go up temporarily, and good investments can go down in the short-term.

Fundamentals have absolutely nothing to do with short-term price movements—using fundamental analysis causes you to focus on the wrong concepts and form biases. Any long-term biases can only cause you to deviate from your trading plan. Your trading plan and the strategies it contains are your guide in the market and prevent you from taking unnecessary risks, or gambling.

Trading Without a Plan

A trading plan is a written document that outlines your strategy. It defines how, what, and when you will day trade. Your plan should include what markets you will trade, at what time and what time frame you will use for analyzing and making trades.

Your plan should outline your risk management rules and should outline exactly how you will enter and exit trades for both winning and losing trades.

If you don’t have a trading plan, you are taking unnecessary gambles. Create a trading plan and test it for profitability in a demo account or simulator before trying it with real money.

How to Avoid the Top 10 Mistakes in Option Trading

When trading options, it’s possible to profit if stocks go up, down, or sideways. You can use option strategies to cut losses, protect gains, and control large chunks of stock with a relatively small cash outlay.

Sounds great, right? Here’s the catch.

You can also lose more than the entire amount you invested in a relatively short period of time when trading options. That’s why it’s so important to proceed with caution. Even confident traders can misjudge an opportunity and lose money.

This covers the top 10 mistakes typically made by beginner option traders, plus expert tips from our inhouse expert, Brian Overby, on how you can trade smarter. Take time to review them now, so you can avoid taking a costly wrong turn.

Top 10 Mistakes Beginner Option Traders Make (Click to watch how to trade smarter now!):

Why even bother trading options?

#1 Option Trading Mistake: Buying Out-of-the-Money (OTM) Call Options

Buying OTM calls outright is one of the hardest ways to make money consistently in option trading. OTM call options are appealing to new options traders because they are cheap.

It seems like a good place to start: Buy a cheap call option and see if you can pick a winner. Buying calls may feel safe because it matches the pattern you’re used to following as an equity trader: buy low and try to sell high. But if you limit yourself to only this strategy, you may lose money consistently.

Watch this video to learn more about buying OTM call options.

How to Trade Smarter

Consider selling an OTM call option on a stock that you already own as your first strategy. This approach is known as a covered call strategy.

What’s nice about covered calls as a strategy is the risk does not come from selling the option when the option is covered by a stock position. It also has potential to earn you income on stocks when you’re bullish but are willing to sell your stock if it goes up in price. This strategy can provide you with the “feel” for how OTM option contract prices change as expiration approaches and the stock price fluctuates.

The risk, however, is in owning the stock – and that risk can be substantial. Although selling the call option does not produce capital risk, it does limit your upside, therefore creating opportunity risk. You risk having to sell the stock upon assignment if the market rises and your call is exercised.

Want to develop your own option trading approach? Check out our free section for beginners, experienced, and experts.

#2 Option Trading Mistake: Misunderstanding Leverage

Most beginners misuse the leverage factor option contracts offer, not realizing how much risk they’re taking. Often, they are drawn to buying short-term calls. Since this is the case so often, it’s worth asking: Is the outright buying of calls a “speculative” or “conservative” strategy?

Before you answer the speculative-or-conservative question about long calls, consider the theoretical case of Peter and Linda presented in the video below. They both have $6,000 to invest.

Watch this video to learn more about leverage.

How to Trade Smarter

Master leverage. General rule for beginning option traders: if you usually trade 100 share lots then stick with one option to start. If you normally trade 300 share lots – them maybe 3 contracts. This is a good test amount to start with. If you don’t have success in these sizes you will most likely not have success with the bigger size trades.

#3 Options Trading Mistake: Having No Exit Plan

You’ve probably heard it a million times before. When trading options, just like stocks, it’s critical to control your emotions. This doesn’t mean swallowing your every fear in a super-human way. It’s much simpler than that: Have a plan to work and stick to it.

You should have an exit plan, period. Even when things are going your way. Choose an upside exit point, a downside exit point, and your timeframes for each exit well in advanced.

What if you get out too early and leave some upside on the table?

This is a classic trader’s worry. Here’s the best counterargument: What if you make a profit more consistently, reduce your incidence of losses, and sleep better at night?

Watch this video to learn how to define an exit plan.

How to Trade Smarter

Define your exit plan. Whether you are buying or selling options, an exit plan is a must. It helps you establish more successful patterns of trading. It also keeps your worries more in check.

Determine an upside exit plan and the worst-case scenario you are willing to tolerate on the downside. If you reach your upside goals, clear your position and take your profits. Don’t get greedy. If you reach your downside stop-loss, once again you should clear your position. Don’t expose yourself to further risk by gambling that the option price might come back.

The temptation to violate this advice will probably be strong from time to time. Don’t do it. You must make your plan and then stick with it. Far too many traders set up a plan and then, as soon as the trade is placed, toss the plan to follow their emotions.

#4 Options Trading Mistake: Not Being Open to New Strategies

Many option traders say they would never buy out-of-the-money options or never sell in-the-money options. These absolutes seem silly— until you find yourself in a trade that’s moved against you.

All seasoned options traders have been there. Facing this scenario, you’re often tempted to break all kinds of personal rules.

As a stock trader, you’ve probably heard a similar justification for doubling up to catch up. For example, if you liked the stock at 80 when you bought it, you’ve got to love it at 50. It can be tempting to buy more and lower the net cost basis on the trade. Be wary, though: What makes sense for stocks might not fly in the options world. Doubling up as an option strategy usually just doesn’t make sense.

Watch this video to learn more option strategies.

How to Trade Smarter

Be open to learning new option trading strategies. Remember, options are derivatives, which means their prices don’t move the same or even have the same properties as the underlying stock. Time decay, whether good or bad for the position, always needs to be factored into your plans.

When things change in your trade and you’re contemplating the previously unthinkable, just step back and ask yourself: Is this a move I’d have taken when I first opened this position?

If the answer is no, then don’t do it.

Close the trade, cut your losses, or find a different opportunity that makes sense now. Options offer great possibilities for leverage on relatively low capital, but they can blow up just as quickly as any position if you dig yourself deeper. Take a small loss when it offers you a chance of avoiding a catastrophe later.

#5 Options Trading Mistake: Trading Illiquid Options

Liquidity is all about how quickly a trader can buy or sell something without causing a significant price movement. A liquid market is one with ready, active buyers and sellers always.

Here’s another way to think about it: Liquidity refers to the probability that the next trade will be executed at a price equal to the last one.

Stock markets are more liquid than option markets for a simple reason. Stock traders are trading just one stock while option traders may have dozens of option contracts to choose from.

For example, stock traders will flock to one form of let’s just say, IBM stock, but options traders could have six different expirations and a plethora of strike prices to choose from. More choices, by definition, means the options market will probably not be as liquid as the stock market.

A large stock like IBM is usually not a liquidity problem for stock or options traders. The problem creeps in with smaller stocks. Take SuperGreenTechnologies, an (imaginary) environmentally friendly energy company with some promise, might only have a stock that trades once a week by appointment only.

If the stock is this illiquid, the options on SuperGreenTechnologies will likely be even more inactive. This will usually cause the spread between the bid and ask price for the options to get artificially wide.

For example, if the bid-ask spread is $0.20 (bid=$1.80, ask=$2.00), and if you buy the $2.00 contract, that’s a full 10% of the price paid to establish the position.

It’s never a good idea to establish your position at a 10% loss right off the bat, just by choosing an illiquid option with a wide bid-ask spread.

Watch this video to learn more about trading illiquid options.

How to Trader Smarter

Trading illiquid options drives up the cost of doing business, and option trading costs are already higher, on a percentage basis, than stocks. Don’t burden yourself.

If you are trading options, make sure the open interest is at least equal to 40 times the number of contacts you want to trade.

For example, to trade a 10-lot your acceptable liquidity should be 10 x 40, or an open interest of at least 400 contracts. Open interest represents the number of outstanding option contracts of a strike price and expiration date that have been bought or sold to open a position. Any opening transactions increase open interest, while closing transactions decrease it. Open interest is calculated at the end of each business day. Trade liquid options and save yourself added cost and stress. There are plenty of liquid opportunities out there.

Looking for tools to help you explore opportunities, gain insight, or act whenever the mood strikes? Check out the intelligent tools on our trading platform.

#6 Options Trading Mistake: Waiting Too Long to Buy Back Short Options

This mistake can be boiled down to one piece of advice: Always be ready and willing to buy back short options early.

Far too often, traders will wait too long to buy back the options they’ve sold. There are a million reasons why. For example:

  • You don’t want to pay the commission.
  • You’re betting the contract will expire worthless.
  • You’re hoping to eke just a little more profit out of the trade.

Watch this video to learn more about buying back short options.

How to Trade Smarter

Know when to buy back your short options. If your short option gets way OTM and you can buy it back to take the risk off the table profitably, do it. Don’t be cheap.

For example, what if you sold a $1.00 option and it’s now worth 20 cents? You wouldn’t sell a 20-cent option to begin with, because it just wouldn’t be worth it. Similarly, you shouldn’t think it’s worth it to squeeze the last few cents out of this trade.

Here’s a good rule of thumb: if you can keep 80% or more of your initial gain from the sale of the option, you should consider buying it back. Otherwise, it’s a virtual certainty. One of these days, a short option will bite you back because you waited too long.

#7 Options Trading Mistake: Failure to Factor Upcoming Events

Not all events in the markets are foreseeable, but there are two crucial events to keep track of when trading options: earnings and dividends dates for your underlying stock.

For example, if you’ve sold calls and there’s a dividend approaching, it increases the probability you may be assigned early if the option is already in-the-money. This is especially true if the dividend is expected to be large. That’s because option owners have no rights to a dividend. To collect, the option trader must exercise the option and buy the underlying stock.

Watch this video to learn how to prepare for upcoming events.

How to Trade Smarter

Be sure to factor upcoming events. For example, you must know the ex-dividend date. Also steer clear of selling options contracts with pending dividends, unless you’re willing to accept a higher risk of assignment.

Trading during earnings season typically means you’ll encounter higher volatility with the underlying stock – and usually pay an inflated price for the option. If you’re planning to buy an option during earnings season, one alternative is to buy one option and sell another, creating a spread. (See Mistake 8 below for more information on spreads).

#8 Options Trading Mistake: Legging into Spreads

Most beginning options traders try to “leg into” a spread by buying the option first and selling the second option later. They’re trying to lower the cost by a few pennies. It simply isn’t worth the risk.

Sound familiar? Most experienced options traders have been burned by this scenario, too, and learned the hard way.

Watch this video to learn more about legging into spreads.

How to Trade Smarter

Don’t “leg in” if you want to trade a spread. Trade a spread as a single trade. Don’t take on extra market risk needlessly.

For example, you might buy a call and then try to time the sale of another call, hoping to squeeze a little higher price out of the second leg. This is a losing strategy, if the market takes a downturn, because you won’t be able to pull off your spread. You could be stuck with a long call and no strategy to act upon.

If you are going to try this strategy, don’t buy a spread and wait around, hoping that the market will move in your favor. You might think that you’ll be able to sell it later at a higher price. That’s an unrealistic outcome.

Always, always treat a spread as a single trade. Don’t try to deal with the minutia of timing. You want to get into the trade before the market starts going down.

Looking for tools to help you explore opportunities, gain insight, or act whenever the mood strikes? Check out the intelligent tools on our trading platform.

#9 Options Trading Mistake: Not Knowing What to Do When Assigned

If you sell options, just remind yourself occasionally that you can be assigned early, before the expiration date. Lots of new options traders never think about assignment as a possibility until it happens to them. It can be jarring if you haven’t factored in assignment, especially if you’re running a multi-leg strategy like long or short spreads.

For example, what if you’re running a long call spread and the higher-strike short option is assigned? Beginning traders might panic and exercise the lower-strike long option to deliver the stock. But that’s probably not the best decision. It’s usually better to sell the long option on the open market, capture the remaining time premium along with the option’s inherent value, and use the proceeds toward purchasing the stock. Then you can deliver the stock to the option holder at the higher strike price.

Early assignment is one of those truly emotional often irrational market events. There’s often no rhyme or reason to when it happens. It just happens. Even when the marketplace is signaling that it’s a less-than-brilliant maneuver.

Watch this video to learn about early assignment.

How to Trader Smarter

Think through what you’d do when assigned well ahead of time. The best defense against early assignment is to factor it into your thinking early. Otherwise it can cause you to make defensive, in-the-moment decisions that are less than logical.

It can help to consider market psychology. For example, which is more sensible to exercise early? A put or a call? Exercising a put or a right to sell stock, means the trader will sell the stock and get cash.

Also ask yourself: Do you want your cash now or at expiration? Sometimes, people will want cash now versus cash later. That means puts are usually more susceptible to early exercise than calls.

Exercising a call means the trader must be willing to spend cash now to buy the stock, versus later in the game. Usually it’s human nature to wait and spend that cash later. However, if a stock is rising, less skilled traders might pull the trigger early, failing to realize they’re leaving some time premium on the table. That’s how an early assignment can be unpredictable.

#10 Options Trading Mistake: Ignoring Index Options for Neutral Trades

Individual stocks can be quite volatile. For example, if there is major unforeseen news event in a company, it could rock the stock for a few days. On the other hand, even serious turmoil in a major company that’s part of the S&P 500 probably wouldn’t cause that index to fluctuate very much.

What’s the moral of the story?

Trading options that are based on indexes can partially shield you from the huge moves that single news items can create for individual stocks. Consider neutral trades on big indexes, and you can minimize the uncertain impact of market news.

Watch this video to learn more about index options for neutral trades.

How to Trade Smarter

Consider trading strategies that could be profitable when the market stays still like a short spread (also called credit spreads) on indexes. Index moves tend to be less dramatic and less likely impacted by the media than other strategies.

Short spreads are traditionally constructed to be profitable, even when the underlying price remains the same. Therefore, short call spreads are considered “neutral to bearish” and short put spreads are “neutral to bullish.” This is one key difference between long spreads and short spreads.

Remember, spreads involve more than one option trade, and therefore incur more than one commission. Keep this in mind when making your trading decisions.

Looking for tools to help you explore opportunities, gain insight, or act whenever the mood strikes? Check out the intelligent tools on our trading platform.

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Comment on this article

Comments

MUHAMMAD N. on March 13, 2020 at 9:14am

Portela on May 10, 2020 at 8:26am

“Trading OTM calls is one of the most difficult ways to make money consistently” Really? Who cares about making money consistently. I bought OTMs (puts and calls) for the past 8 years in Brazilian market. In one of the assets I made 92 operations (buying otm puts). I lost money in 88 of those. But the profit I made in the other 4 was enough to give me a return of 291% at the end of the 8 years. This is equivalent to 18.6% each year! So, tell me more about not buying OTMs.

Don on July 26, 2020 at 10:13am

I trade OTM too its hard but theres good returns if your right specially when you strangle making the market maker a lot nervous

ISHWAR C. on September 19, 2020 at 11:11am

In fact OTM option is cheaper than ATM and ITM option.most appropriate reason for preferring OTM is its cost factor.Those who know that buyers of cheaper articles have to cry time and again and the buyer of dearer article has to cry only once,never go to OTM option rather they prefer ITM and ATM .However keeping in view the cost ATM is advised. As one analyses the trend with the stages upward/downward and expects a desired level in a direction ,for immediate result ATM is best suited.Though it is less lucrative in comparison to ITM but it is best with respect to cost factor.

Donald H. on October 25, 2020 at 3:07pm

Good info for the beginner but I would like to see an example with real values as well as what the minimum dollar amount would be .

Ally on November 1, 2020 at 11:41am

Thanks for that feedback, Donald. We’ll pass your request along to the team!

Susan S. on July 16, 2020 at 9:06am

What is Brian Overby’s email? Can’t get the link to work.

Jk on October 19, 2020 at 4:01pm

Great article. just found out how many mistakes I made!

Ally on October 28, 2020 at 3:37pm

Hi Jk, so happy to hear that you found this helpful. Thanks for reading!

Todd on January 15, 2020 at 8:26am

It was helpful, however, I feel that it was lacking examples and knowing what your goal or object was besides making the money. Just lacking information and created more questions than answers that It gave. But at the same time this course is based on the top 10 mistakes and pointing them out. So looking at it from that standpoint, I guess I got it.

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