3 Common Faults That Hold Traders Back

05/12/2015 6:00 am EST

Focus: TRADING

Nial Fuller

Founder, Learn To Trade The Market

The road to trading success doesn't happen overnight, writes Nial Fuller of Learn To Trade The Market, but avoiding these three mistakes will help prevent developing traders from wrecking their accounts in the early stages.

If you're currently struggling to keep your trading account above water or you're losing money in the markets, you're probably making at least one of the following three trading mistakes. Read on as I discuss some common traps that traders fall into and some ideas on how to dig out of them.

Having Unrealistic Expectations About Trading

This one is big, because if what you are expecting from your trading is not in line with what's really possible given the risk capital in your trading account, you are probably going to lose money.

Let me explain. Many traders think trading is an "easy" way to make money and that all they have to do is buy some trading system that sounds like it will make them a bunch of money fast, install it on their computer, and start printing Benjamins! Well, I can tell you that is not how trading works.

The primary expectation that most traders have wrong is thinking that they are going to turn their small trading account into a full-time trading business in a very short period of time.

The truth of the matter is that if you have a small trading account, you have to accept the fact that you're going to have to build it up slowly and methodically over time; not in a haphazard, gambling-like manner as most struggling traders try to do. If you trade like you are gambling, by risking too much and overtrading, eventually, it will catch up with you, even if you get lucky at it for a while.

Many traders learn this lesson the hard way through trial and error, so if you want to save yourself a lot of time and money, heed my advice by accepting that you can't get rich quick in the markets.

Not Taking Profits

It's true that reading a price chart is not technically difficult to do, and I actually teach and trade using simple price action strategies, so I am the first person to tell traders to simplify their trading and that price action is an easy way to read and trade the markets.

But-and that's a big "but"-there's a huge difference between being able to read a price chart effectively and actually extracting consistent money from trading it, and most any trader with some experience under their belt knows what I'm talking about here.

The problem that most traders face is that they seem to be unable to secure profits even though they get into profitable trades. The primary reason for this is because they are too stuck on hitting that big winner on every trade, and that's just not a realistic approach to trading.

You have to learn to take profits when they are there, and stop hoping to hit one out of the park on every trade. There's nothing wrong with taking a profit of two or three times your risk per trade if it presents itself. Most of the time, holding out for a much larger gain is not the best thing to do.

Of course, that doesn't mean you should purposely cut a trade that is running in your favor in a strong trend; it just means that you should consider the market conditions and be realistic about the potential of a trade to continue moving in your favor.

Most traders freak out and panic as a trade retraces against them, and often, they get stopped out at breakeven or they take a tiny gain compared to how much they were just up in open profit.

So, you need to stop expecting every trade to go to the moon and realize that the best time to take profits is when they are right there staring you in the face...not when the market is racing back against your position.

NEXT: Don't Overcomplicate the Trading Process

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Overcomplicating the Trading Process

Perhaps the most widespread trading mistake is that of making the entire process of trading way more complicated than it needs to be. Almost every trader falls into the trap of searching for some "Holy Grail" trading system at some point, usually early on in their career.

To be honest, the sooner you give up this search, the sooner you will get on track to profitable trading. Most of the time, on their quest for that "Holy Grail" trading system, traders end up buying software-based systems, indicator-based systems, and generally just end up adding numbers and variables to their charts.

The problem with this is that the more variables you add to your charts, the more clouded the true picture of the price action of the market becomes. There are patterns and high-probability set-ups that we can learn to trade just from the raw price action of a market, so you don't need to add indicators and trading robots to your charts.

To analyze the markets accurately and create an effective trading method, you only need to learn how to read and trade off the raw and natural price action of the market.

Traders have a tendency to give too much weight to news variables and other fundamentals. There's really no useful reason to sit at your computer all day reading economic news reports and so-called "expert" opinions of what it "might" cause the markets to do.

The reason why there's no useful reason to do this is because all variables that affect a market are reflected via its price action. When traders try to "figure out" what's going to happen in a market based mainly on news releases and economic events, it really is a waste of their time. Anyone who has studied markets and traded for a while knows that markets tend to move in anticipation of news events, and once the news event is over, the market will tend to stall or react opposite to what the news implied.

This is so because once the news comes out, there's nothing more to expect from it, and the news event is usually already priced into a market by the time it's actually released. Thus, there is simply no reason to spend hours upon hours reading economic news releases when you can simply learn how to analyze and trade off of the price-action trail left behind by all fundamental and news variables in a market.

By Nial Fuller, CEO and founder, Learn To Trade The Market