Investing Advice: Top 10 Mistakes Traders Make

Posted On November 22, 2017 11:40 am

As we head into this Thanksgiving season and we count the things for which are grateful some traders, particularly the bears, might be mulling over their regrets. Today’s investing advice is about learning from these mistakes. It’s inevitable, especially early in our trading career, that mistakes will be made and they can serve as useful lessons. The losses can be chalked up to a form of tuition.

But some of most costly mistakes are also the most easily avoided. Here, Steve Burns provides a list of the 10 Reasons Traders Lose Money:

With all the fancy charts, fundamental analysis, and experience with price action, you would think that the majority of traders would be profitable. The sad fact is that most are not successful. The majority of all traders contribute to the profits of the minority that are profitable. Even seemingly successful firms like Amaranth and Long Term Capital Management can, and do, blow up. Individual traders like Victor Niederhoffer, who looked like a market wizard for the majority of his career, destroyed more than one account. In fact, most professional money managers fail to beat the benchmark index they are paid to exceed.

Why is this? If it was just a matter of being smart, then the trader with the highest IQ would make the most money. If it was only a matter of charting skills, then the trader with the most complicated charts would be the wealthiest.

 Related: This Market Shows How Investors Think – Here’s What it Says Today

Here are ten fatal errors made by misguided traders who are destined to fund the accounts of more skilled traders.

  1. A trader must have a trading plan with well-defined entries, exits, and position size before they make any trades. Trading with no plan creates random results, and the profits that are won as a result of chance will eventually return to their rightful owners.
  2. Traders must have an edge to be profitable. The traders that have discipline, have done their homework about historical price action, and stay in control of their emotions will make money.
  3. The biggest mistake that the majority of traders make at all levels, is that they trade too big. Big position sizes cause emotions to run high, infringing on reason. Big losses are also more financially and emotionally devastating. The position size of a trade should never put a trader’s lifestyle or trading career at risk.
  4. When the markets open, the trader must have the discipline to follow the plan they created when the market was closed. No system will work if the trader does not have the discipline to follow it.
  5. When a trader’s desire to be right is greater than the desire to make money, they will illogically let a losing trade run to avoid admitting that they are wrong.
  6. Fear of giving back a small profit will cause a trader to miss a bigger winning trade. Most profitability is based on the big winning trades. A winning trade should not be exited until there is a good reason to do so.
  7. If a trader does not take their original stop loss, they will allow small losses to become big losses. Big losses generally are what cause a trader to be unprofitable. Many good trading systems become profitable simply by removing the big losses from the trading results.
  8. Traders that do not account for events outside the known bell curve can be ruined. Events that have never happened before can happen. Hedges, stop losses, and position sizing are the insurance policies against the sudden risk of ruin.
  9. Traders with too much hubris will eventually make a decision that insures a fatal trading result.
  10. Personal predictions have no value, because the future does not exist in the present moment, no matter how strong a trader’s convictions.

Long-term, successful traders have many common characteristics:  They religiously follow a plan, they have an edge over the majority of market participants, risk management and capital preservation is their number one priority, and they go with the flow of the price action rather than predict. They also admit they are wrong quickly, and never quit learning.

The humble and the flexible traders are the most successful risk managers, and they will end up with all of the chips in the end. Trade safe.

 Related: Is Investing Too Passive? Here’s How You Can Still Beat the Market

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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