Mistake number 1: Emotional attachment to losses – this is not by accident the first mistake on the list as it is the most common mistake that new traders tend to do. You set a stop loss to a trade at 100 pips, the trade doesn’t go your way so you adjust the stop loss, when you reach the 200 pips point, you decide in your mind “how low can it go?!” or “it must go up,” and you keep adjusting the stop loss until you are destined to lose much more than you were willing to initially lose on that specific trade.
Mistake number 2: Taking small (or really small) profits. In a way, the execution of this mistake is very similar to mistake number one except of course it goes in the complete opposite direction. You enter into a trade, see that you are “in the green” and decide to take the profits before you reach the take profit that you had initially planned.
Mistake number 3: Trying to recover losses in one big trade. After you suffer some losses you decide to open up one high leverage trade to recover all the losses that you suffered on your trades in the past.
Here are three simple rules to prevent these two mistakes:
First of all detach yourself emotionally from your trade; this is not a long term relationship. Remember – this is a business and like any business if it’s not profitable, then you should sell/close the business.
Second, decide on a strategy and stick with it. Choose a risk/reward ratio on your trades, if the reward is higher than the risk and if you have 60% winning ratio on your trades, over the long run (after a month, quarter and even a year) you’ll be in profit.
Third, use low leverage and don’t risk more than 2% of your equity on a single trade. In order to succeed in rule number 2 you have to follow this rule.
The rules are very simple and for some reason very hard to follow, with a few years of experience I find it also myself sometimes hard to keep disciplined. But as long as you keep discipline, believe in yourself and stick to your strategy you will have a much better chance of becoming a successful trader.