Hello traders! In this week’s newsletter, I’d like to talk about a few trading mistakes that many new traders make, all of which I’ve made. Some of them, I’ve made numerous times…
In no particular order, the first trading mistake that many make is to move their stop loss the “wrong” way as price approaches. I know, I know, all of the experienced traders reading this will say “You never move your stop to take a bigger loss!” But I can almost guarantee that every trader has done it once or twice in their trading history.
The major problem with moving your stop is that sometimes it works! If you have a trade where you are willing to risk 20 pips with the expectation that you will make 60 pips, as price approaches your stop you might think that an extra five pips or so isn’t a big deal. In the grand scheme of the time you spend trading it isn’t. However, the habit of doing this can be disastrous to your trading account. Here is why:
- When you move your stop further away, then your wins will need to be larger to make up for the larger loss. We strongly recommend taking trades that can potentially offer at least a 3:1 reward to risk ratio. If you don’t look for the bigger wins, your reward to risk ratio ends up being an ugly 2:1, or even worse a 1:1. Good luck growing your account with that.
- Moving your stop just a little bit sometimes does work out and you end up making a profit. Hurray for you! Will you do it again? If moving your stop 5 pips worked for you, what’s to stop you from moving it 10 pips? Or 110? You get in the habit of making this trading mistake and then suddenly, a good week or even month of good disciplined trading is wiped out by taking one huge loss for that month. You may have even moved your stop so far that you blew up your account! Bob Dunn, one of our more seasoned instructors and traders is fond of saying “Amateurs go broke by taking large losses. Pros go broke by taking small winners.”
This leads me to our next trading mistake: taking your winners too quickly. This is especially problematic if you’ve taken a couple of losses in a row, which will more than likely happen to all traders at some time or another!
The problem is that if you take a few losses in a row, many traders will be too eager to lock in that “green on the screen”, a profitable trade. The psychology of a few losses very often overwhelms the logic of “letting our winners run,” which was covered in my previous newsletter. The psychological satisfaction of locking in those profits is understandable but really goes against most of our long-term plans.
Whenever I get into a trade, I have an expectation that I will be able to let part of that trade run for hours, days or weeks. That’s where the big money is in trading! Trying to trade for a bunch of ten pip winners a day is a bit too much work for my blood. I’m a trader so I can do other things with my time, instead of staring at a screen for ten hours a day! You might be making money in the markets, but are you making just a pittance for your efforts? Are you up 2% over the course of a year? Yes, you are really making money. In order to make a better return, let your winners run properly.
The last trading mistake I’d like to mention this week is “revenge trading.” What does that mean? It’s where you say, “I want to get my money back!” Suppose you take a $1000 loss on the EURUSD pair. You immediately and angrily attempt to place a trade on the EURUSD because it has your money and you want it back! Sorry to burst your bubble, but the EURUSD doesn’t have your money. If you take a loss trading Apple, (AAPL), do you drive out to California to get your money back from Apple headquarters? Of course not. That loss is just part of participating in the market; NO ONE makes money on every trade, so please accept losses as a part of trading. Make sure the loss is small, don’t angrily trade to get your money back, just calmly move on to the next trade.
As I previously mentioned, I’ve made all of these mistakes, some of them many times. I’ve been fortunate enough to become disciplined in my risk management rules, which is truly the difference between successful traders and unsuccessful traders. If you find yourself making these same mistakes, please stop right now! I want you to be a consistently profitable trader, not just “dabble in trading.” Isn’t that the real goal in trading anyway?
Until next time,
Rick Wright – firstname.lastname@example.org