The Dangers of Feeling the Trade Instead of Thinking the Trade

01/06/2017 11:00 am EST

Focus: STRATEGIES

While there's nothing wrong with enjoying some beginner's luck as a trader, it's important not to have it turn into a rookie mistake, so Yael Warman of Leverate highlights the most common errors that novice traders tend to make and suggests several ways on how to avoid them.

New traders typically go into the market full of confidence and optimism. If their first few trades go well, they start to believe trading is easy, that they are cut out for this, and they are well on their proverbial road to riches. They forget that trading is a demanding occupation, one which should be treated as a professional endeavor; and thus, become complacent and begin taking excessive risk.

There is nothing wrong with enjoying some beginner's luck, but if you want to avoid your beginner's luck turning into rookie mistakes and rather turn it into constant and consistent profits, take into consideration the newbie trader's most common mistakes and try to avoid them.

Do not get overconfident. Don't think that because you made a few good trades when you got started, you were born with a gift. Good traders recognize that trading is not easy. It requires discipline and learning and it goes well beyond buying low and selling high. Celebrate your profits, there is nothing wrong with being happy about making some money, but don't have high expectations during your first year. Take the time to learn, be realistic, and learn both from your winnings as well as your losses. Analyzing your trading session each day can determine your success as a trader, so get in the habit of doing a post-trading analysis.

Another mistake rookies often make is that they get emotional. There are several ways in which you can spot a trader who is feeling the trade, rather than thinking it. You can tell a new trader is being emotional because they will talk about "hoping the trade goes well" or "having a feeling about this one." They may feel so sure about a certain trade that they will go "all in" and forget about taking proper risk control. Emotional traders think of money as their safety-and-power-provider, and when they lose money, that safety and power is taken away and the decisions they make are often rash and erroneous.  A newbie trader is often paralyzed by losses and instead of capping their losses and getting out of a losing trade quickly and moving on to the next one, they'll wait in hopes that the trend will change for the better and see mounting losses. In order to emotionally detach yourself when trading, begin trading small amounts of money. Something you wouldn't mind losing. With time, you can raise the amount of money you trade, but always remain within your comfort zone. Losing small amounts of money is less distressing both on your pocket and on your emotions. Another tip to desensitize yourself is to evaluate your winnings and losses at the end of each month, rather than at the end of each day. Do analyze your trades, but keep a long-term outlook on your P&L. To read the entire article, click here.

By Yael Warman, Content Manager, Leverate

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