The 3 Biggest “Newbie” Mistakes

When “newbies” or new traders first begin to get involved in trading, they start scouring the internet forums, chat rooms and websites for information. Their first inclination is to get as much information they can for free – and that’s OK because there is a lot of solid information out there to build a good trading foundation. However, remember these are just the basics. Trading has many nuances required for success and consistency – just a few of which are a thorough understanding market structure, trading psychology and trade plan development (in addition to lots of practice and screen time.)

The typical perception is that people are getting rich with little or no effort; that, and trading is so simple that anyone can learn it in a minimum amount of time. These perceptions lead to common mistakes made by new traders over and over again. Here are the Big 3:

1. No Trade Plan – Most new traders assume a trade plan is just a set of rules to enter the market, place stops, and set profit targets. Not so. A good trade plan has been back tested thoroughly to provide statistics that will build the trader’s belief in the trading system and eliminate surprises and uncertainty. For example, knowing the average draw down, average losers in a row and average duration of the trades to profit targets will help eliminate the anxiousness and avoid the classic mistake of closing trades too early and staring at every tick with emotional schizophrenia. A trade plan is more than just a set of entries, stops and targets; it is the complete synopsis of your trading system’s performance and execution. That is why trade plan development is the most critical element in your success as a trader and a skill you must learn. (More on trade plan development in future posts.)

2. System Jumping – There are an infinite amount of systems and indicators out there. Newbies are impatient. Their expectations are unreasonable. The tendency is to abandon a system after the first losing trade or add the next magic indicator that will produce overnight wealth. Trading is a long term endeavor; that is if you want to make lots of money and ultimately trade for a living. True, you will have to sort through a few systems to find one that conforms to your personality, however jumping from system to system will not get you further down the road. The challenge is to have the discipline to stick with a system and become an expert at using it. We recommend trading one pair on one time frame – and get really good at that. Back testing will prove whether or not your system has a positive expectancy (profitability over time.) Then trade the system and tweak it to your personality. You can then add other pairs or time frames after you achieve some consistency. Don’t rely on someone else to give you the end all, be all system. It is not out there. If fact, the system really doesn’t matter. It is your discipline to follow the rules that will make or break your account. So get comfortable with one system and work it. This will get you in the habit of following your rules, manipulating your platform efficiently and developing your trading mindset. Slow and steady will always win this race.

3. Live Trading Too Soon With Large Lots (Too much Risk)– New traders often think that with just a few hours of study and following someone else’s advice, they can enter the market and play with the pros. Putting your capital at risk without hours of practice is suicide. Most newbie mistakes can be attributed to aggressive trading, lack of platform dexterity, no rules of engagement or no clear, actionable trading plan. These are typical and often recoverable. The most egregious behavior while making these mistakes is doing so with huge risk (trading large lots.) This is like jumping out of a plane without a parachute. The consequences of this risky behavior will be a substantial loss of capital – unless you are independently wealthy all ready. If you do have money to burn, you will continue to re-load your account with new funds to convince yourself your past mistakes were a fluke. This should serve as a wakeup call to slow down. These mistakes can all be resolved by practice (in a demo account or live micro account) – not just any practice but “Perfect Practice” – that is, you must practice with the focus and intent you would use as if your income depended on your success in the market. If you had to make a living tomorrow as a trader, would you still exhibit such reckless behavior? No – you would calm down, get focused and work your plan. This mindset will be the starting point for consistent profitability and will make the transition into live trading with larger lots less stressful.

Needless to say, there are other challenges new (and old) traders must face; but the three described above are the most common for new traders.

The fact is, especially in trading, the anonymity afforded to those online leads to many false claims of success and perpetuates the perception that trading is a “no brainer.” These claims are often the appeal for new traders and the motivation for getting into the trading game. Once discovering that trading is not as easy as it looks, newbies are hit with the reality that many people in forums and chat rooms lie. In order to save embarrassment, they will do the same. But most important is that they will lie to themselves; clinging to the idea that they can somehow fake and/or grind out their way to trading success. This delusion will never lead to the desired goal of trading nirvana. The fact is that most forums and chat rooms are filled with losing traders – remember the often quoted stat that 90-95% of traders lose money.

The good news is we can break this cycle by making the commitment to learn the skill of trading and admit to ourselves there are no short cuts (Welcome to the 5-10%!) The best part of all is that the hard work literally pays off!

Rick

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