Most investors/traders do so on their own considering themselves immune to the typical mistakes repeatedly made by the vast majority. To help you avoid these pitfalls we look at some of the most common and costly mistakes to help you maximise your profits and trading lifetime

More Haste, Less Speed

Many individuals think it’s easy to call the direction of a share/index/currency or commodity and just jump in. No plan. No objectives. Just click and hope.

This can prove a dangerous way to start trading. While you may bank some quick profits, what happens if you make a succession of losses? After all, you are risking your money. While you might be prepared to risk the money, you don’t really want to lose it, do you? Consider asking yourself the following questions first.

What’s your plan?

Why are you trading?

What are you going to trade?

The first question sounds obvious but it’s surprising how many people don’t immediately reply “to make money”. You are risking your money to make more money. Simple.

The second question helps you focus on what you may already have an understanding of. While today’s trading platforms allow you to trade anything from the Japanese Yen to Sugar to the German DAX, you might not appreciate what drives their prices or how their respective contracts are priced.

If you are an avid investor in Barclays or Sainsbury shares, however, CFDs offer you a simple trading alternative, which is almost exactly the same and typically more cost efficient.

What returns do you hope to achieve?

What losses can you cope with?

How frequently do you plan to trade?

And over what time frame?

The last four questions are key in helping you decide how much to risk on any one position at any one time if you are to meet your goals while respecting your trading limits. Taking on increased risk has potential to deliver increased profits but with this comes potential for increased losses. Lastly, if you have a plan, stick to it. 

“Markets can be both your best friend and your worst enemy”

“It’ll never fall that much”

When placing a trade it’s natural to focus on the profits that could be made. It’s optimism. It’s human nature. However, it’s also prudent to consider what you could lose on the trade before deciding whether it is worthwhile.

The best traders always also consider the worst-case scenario for each trade, i.e. – how far the price could move against them. While we tend to be quick to set automatic exit points (limits) to close a trade in a profit, it’s equally important for traders to consider doing so at the other end (stop losses) to limit the possible damage from a bad trade.

The best traders weigh up the potential risk AND reward involved in a trade before deciding whether to proceed. While there is nothing wrong with placing lots of trades with the aim of banking lots of small profits (it is a perfectly valid strategy) risking too much and taking too many costly losses along the way is best avoided. See our educational piece on Risk vs Reward.  

If a profitable trade wants to become more profitable, why not let it? Trailing stop losses can be used to lock in rising profits. If a trade is going wrong, however, why risk letting it get any worse? After all, you only get one chance to lose all your money.

Example

If trading £10,000 of Barclays CFDs several times a day (day trading), looking to book several gains of £200 by the market close it might be wise to employ stops losses 2% away to minimise the potential loss on each trade to £200.

If trading less often over a longer time period, however, hoping for returns of £2,000 or 20% it might be more appropriate to use stop losses 5-10% away, allowing the price to move around/breathe and avoid you being stopped out unnecessarily during the inevitable daily/weekly ups and downs.

The Market’s Wrong, Not Me

Don’t let pride and ego get in the way of successful trading. If you’re wrong you’re wrong. Exiting a bad trade may hurt, but staying in one can end up hurting more. A trade may be right today but can easily be wrong tomorrow. The clichés are endless. Be honest and move on. As in life, learn from the experience. If there is big news that changes your view on a trade, it may be time to re-evaluate your position.

“Trade what you see, not what you want to see”

Doubling down?

When a price drops sharply traders often get involved hoping that a recovery and significant gains will ensue. ‘Doubling down’ or ‘averaging in’ are valid strategies, widely used and which can prove highly successful, however, we mustn’t forget that a 10/20/30% fall requires a bigger percentage recovery (see below) in order to achieve breakeven. While the absolute change in price will be the same, but the new lower starting point means that the percentage recovery required is much greater.