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Trading Psychology

Five Common Trading Mistakes and How to Overcome Them - Part II

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In the previous article, we covered the two main reasons why traders often end up losing money. The first being the chase to catch tops and bottoms, which can be lucrative but also comes with big risks. The second mistake being, making use of improper money management techniques or entering a trade too late into the trend.

Despite coming up with a good analysis, when traders put aside their trading plan and focus instead on chasing the trade, it can lead to serious mistakes.

In this second part of the series, we look at some of the other commonly made mistakes in trading, continuing from part I.

3. Cutting winners too early

Cutting winners too early and leaving losing trades running too late are often associated with emotions of fear and greed. The best way to overcome this is to ensure that you follow a trading plan.

A trading plan should ideally tell you which levels to take a position in the markets, which levels would invalidate your trading bias and of course, the money management aspect so that you do not expose all your trading equity in just one trade.

The above mistakes can also be made when your trading strategy is either new or that you do not have enough confidence in your trading set ups. Try to get familiar with your trading strategy and learn to be more objective with your analysis.

When your trade reaches a level of invalidation, cut your losses and move on. When your trade is working in your favor, always make it a point to make use of trailing stops or breaking down the positions so that you book profits are regular intervals.

A trading plan will not only tell you how to navigate the uncertainty from a trade but also helps to bring about some level of objectivity into your analysis. Even if the trade goes against you and you are stopped out, you would know the reason why, rather than let emotions rule the outcome.

4. Peer Pressure

Peer pressure goes by many other terms. Being influenced by what's being said in the financial media. Most of these gurus often sound confident in their analysis and trade calls that they make and at times when your trading confidence is at an all time low you can end up basing your trades simply by what the pundits are saying.

The best way to overcome this is to build familiarity with your trading system, which is nothing but practice and more practice. Another factor to bear in mind is that when a trading guru speaks about a trade set up, the finer elements are missing.

A hedge fund with $100k in trading capital can well manage a 100 - 500 pip drawdown in their trade, but not so much a retail trader who trades with just $5000 or lesser. Always learn to take any trading advice with a pinch of salt.

5. Being married to your bias

As a trader flexibility is what you need but within balance. Staying committed to your trading bias can be disastrous leading you to continue adding to a losing position which could eventually affect your bottom line equity.

On the same note, trying to be too flexible by switching between positions whenever the markets make strong turn can also be disastrous. When it comes to trading, traders need to find a balance between staying committed to a bias but only so long as the markets prove you wrong which is when you need to accept the fact and cut your losses.

It is only but obvious that as humans, mistakes do happen. That said, as a trader it is your imperative that you identify these mistakes, especially if you find yourself repeating them frequently. Even the best of traders make mistakes, but the difference between a successful trader and the rest is that mistakes are weeded out early and corrected.

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