I'm sure you've heard the statistics,
most retail traders lose entire account within a year,
only 5% of retail traders make a profit long term, trading the financial markets is a scam and so on
It's hard to know how accurate these figures actually are but It's easy to see why statistics
like this give so many people a negative opinion of trading the financial markets.
On the face of it, it seems like a huge waste of time and money. But what these headlines and
statistics never divulge is why new traders fail. The reality is that the vast majority of people
new to trading make the same few mistakes. The reason we all make the same mistakes is
because we all think in a similar way. This is because in most things we do in life,
approaching each new task in relatively the same way has worked for us. But trading is unlikely to
be similar to anything you have done before. It's surprising but a lot of the skills you may
have developed in other areas of your life don't really transfer over to the world of trading very
well. In fact, they may be in direct conflict with the skills you need in order to succeed,
as I will demonstrate in this video. So grab yourself a coffee and over the next X minutes,
I'll break down the most common trading pitfalls new traders fall into so that you don't.
Hi, I'm Luke from Disciplined Trader. I have been trading for nearly 10 years
and uploading trading content to this YouTube channel for almost 5 years.
If you are new to trading and are interested in building your knowledge then hit that subscribe
button. I don't think you'll be disappointed. A big problem new traders have, that also
contributes to many of the other issues they run into, is the expectations they
have when they are first learning to trade. A huge benefit of running this YouTube channel
is that I get to speak to lots of traders every week via the comments sections on my videos
and via email. All this conversing has made it abundantly clear that a lot of people who start
trading have very warped expectations of what they are likely to achieve and in what time frame.
A lot of new traders think that they will be making consistent profits relatively quickly
because of the what they see online, the main culprit being social media platforms like
Instagram, Twitter and even here on YouTube. There are a lot of people who make trading seem like a
fast and easy way to make a lot of money. The trouble is, in theory it is possible to
make a lot of money in a short amount of time when trading.
The reality is it's highly unlikely and not the way you should approach the markets if you want
to make sustainable profits over the long term. I've had people say to me they are looking to make
10, 20 even 50% per month from their trading. These figures are absurd.
There isn't an investment on the planet that would make these kind of consistent returns.
I think most people know these figures are crazy but something in our brain wants to believe they
are achievable, so we suspend our disbelief and buy into it hype. Unfortunately this just leads
to disappointment and ultimately failure. The truth is successful traders make as
little as 1-2% on average per month. And this could mean that one month you could make 8%
and the next you could lose 5%. The returns aren't consistent week to week, month to month or year to
year. And you shouldn't expect them to be. Some traders do make more than this but new
traders shouldn't expect to be able to achieve this in a short amount of time.
The traders that make more than this are at the top of their game. You wouldn't expect to learn
to swim and then be competing in the Olympics three months later. The principle is the same.
You should think of it more like studying for a degree. You're not going to be able
to learn what you need to know and start making money in the markets within a couple of months,
it's just not achievable. But two, three years from now? You could be in a very good place.
I have been trading nearly 10 years and there is still plenty for me to learn.
A major pitfall traders often fall into is not paying enough respect to risk management when they
start trading. Risk management for me is the only holy grail in trading you are ever going to find.
A sound risk management strategy will ensure you aren't overexposed in the markets,
keep your losses to a minimum and enable you to profit effectively
when the opportunity is there. Risk is one of the few things we have control
over in trading and failing to do so usually ends very badly.
A typical risk management strategy will specify the risk parameters allowed when
using a particular trading strategy. This usually includes details such as what proportion of their
account they can risk on a trade. This might be a maximum of 3% per trade for example.
It may also detail what the maximum loss in a day can be. So if the trader loses 5% in one day,
they have to stop trading. I have a more in depth video on this topic
that I will link in the cards and description. What a lot of new traders do is pluck numbers
out of thin air when they are deciding what to risk on a particular trade. Usually they
make it a nice round number like £10 per point or £250 in total, regardless of their account size.
Commonly however, this can be equivalent to a large proportion of their account,
like 20% for example (I've even had traders tell me they've risked more than this on one trade!).
This is a fast way to blow the entire account as losses in trading are inevitable. And when they
do happen and you lose a large percentage of your capital in a short space of time,
you can become very emotional which leads to more problems that usually don't end well either.
Being able to control your emotions when trading is a very difficult skill
and one not many people are familiar with doing. You may have heard successful traders trade like
robots and to an extent this this true. They use a trading strategy that has an edge
over the long term and use this in conjunction with a risk management strategy
that enables them to take losses but still be in the game to see the profits.
They do all this whilst not letting losing trades get them feeling down
and not letting the winning trades get them feeling over-confident.
Letting the emotions get the better you when trading leads to some common mistakes.
The first is revenge trading. This happens when you have a losing trade and feel angry
at the market. This could be because you were convinced this trade was going to work
and it didn't. You may have even risked more on that trade than you were meant to. Or maybe the
price just hit your stop loss and then started moving in the direction you wanted it to.
There are a variety of scenarios that can cause this feeling of anger and resentment towards the
market and you just want to prove you know what you're doing. So you rush into the next trade,
ignoring some of your rules, in a desperate attempt to get revenge on the markets
and win back the money you just lost. Maybe you instantly reopen the trade where
the stop loss was only just hit. Maybe you double the position size so that when this trades wins,
you'll make back the lost money and more. And what often happens is that market continues to
move against you, you end losing more money and you probably end up ignoring more of your rules
in regards to exiting the position or the amount of money you can lose on one trade.
You can see how scenarios like this can quickly end up with a trader blowing an entire account.
This is why having things like a risk management strategy in place to control the amount you can
risk on any given trade and a trading strategy to tell you where and when to enter and exit a trade
are so important. However, having these strategies isn't enough if they end up being ignored.
Having discipline when trading is just as important as having a plan.
I'll be completely honest, this is one of the hardest parts of trading.
Like I said, most of us have never really had to keep our emotions in check like this.
Also trading is very exciting when you start and being told you can't get excited
about a winning trade or not letting yourself be disappointed by a losing trade is very difficult.
I've found from not only my own experience but from what others have told me too,
this ability simply comes from repetition. The more time you spend trading, the more you become
comfortable with what you are doing, the more times you witness winning and losing trades,
the less exciting it all becomes. And when that excitement has dampened,
ensuring you don't let emotions make your decisions is a whole lot easier.
So whilst you are building your trading experience, keep the risk on your trades
small and the emotions that follow will be smaller and more controllable too.
Pretend for a moment that you are a waiter in a restaurant. If when you take the orders of the
customers to the kitchen, you are only getting the orders correct around 60% of the time,
the boss would say, look you need to get a lot better at this or you'll be fired.
In this job you are required get details like this right pretty much all the time.
I think we can all agree on that. And this goes for pretty much anything we do in life.
If we only had a 60% success rate at something, we'd need to look at what we are doing wrong
in order to get the success rate much higher. This isn't something anyone would need to be told
either. We as humans are sort programmed to do this automatically but this becomes
very problematic when you enter the world of financial market trading.
Because when you are trading, you can't always be right. It doesn't matter how to approach it,
there will be times when you are wrong and the trade won't work out.
This sounds easy to understand and it is. But it's one of those things we do as humans where we hear
something but we don't listen. Not really. The thing with trading is,
no matter how accomplished you become, being wrong will always be a part of it.
You will never be able to eradicate the losing trades completely.
It's impossible. And for the traders that struggle to accept this it can lead to a few problems.
The first is not taking a loss when you are supposed to. When you are in
a trade that isn't going as planned and price is moving towards your stop loss,
have you ever got that urge to just move that stop loss a little further away?
You might try and rationalise it by telling yourself that the original stop placement
didn't really make sense anyway, it would be much better a little further away. So you move it.
Price continues heading for the stop loss though and you might go through this process a few times.
The stop loss getting further and further away from the original entry level each time. Until
you get to the point where the unrealised loss on this trade has got to a size that you just refuse
to accept. So you delete the stop loss level altogether. You tell yourself, I'll close the
trade out when it gets back to a certain level. This could be the original stop loss level,
break even level or another level altogether. The danger now is that price could well carry
on moving against your trade and never come back to whatever level you have in your head.
And now there is no planned exit point either, the potential loss on this trade is limited
only by the amount of money in your account. You can see how easily this sort of mentality
can lead to the entire account been wiped out in one trade. The refusal to accept that we
can be wrong can be very dangerous. Equally as damaging though, although not as easy to see, is
that in our efforts to be right all the time, we snatch at profits whenever they are available.
You may be in a trade that moved into profit quite quickly initially but now seems to be
stalling. It's about 20% of the way towards the take profit level but it just seems to be
struggling to move past the level it's currently at. You may think, you've seen this before,
the last time this happened, it stalled and then reversed before hitting your stop loss.
Well instead of watching that happen again, you take the profit whilst it's on the table.
Obviously what happens next is price breaks past that level
and makes it all the way to the profit target you had originally identified.
On the face of it, this might not seem detrimental but it can be. If you are only realising 20%
of the profits you could have made because you got scared that price might reverse
then this will have a huge impact on your long term profitability.
You winning trades need to pay for the losses and then leave some profit. If you aren't letting
your winning trades run long enough to do this, the losses will slowly diminish your account.
You may have heard the trading saying "cut your losses short and let your winners run". When I
first heard this I laughed. Of course we all want to do that, but that's easier said than done.
I've come to learn that the interpretation of that saying is this.
You cut your losses short by accepting the loss and letting
price hit your stop loss level. Don't increase the loss by moving the stop loss or even worse,
deleting it altogether. And you let your profits run by keeping calm when in profit and allowing
your trades the room and time to work their way to the profit targets that you've identified.
This saying is old but gold, keep it mind if you ever find yourself struggling to
take the loss or wait for the win. So traders I hope you have found that
video useful, If you have, remember to hit that like button for me so the
YouTube algorithm can do it's thing. Most of the content I make here on this
channel is to try and help people improve their trading knowledge
and skills so I'd love to have you as a subscriber if that's something you are trying to do.
Have a great week in the markets traders and stay safe.