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How to Fix Trading Blunders You Don’t Even Know You’re Making

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January 14, 2016
Adjust the picture or the perspective? Tips to battle common trading blunders

We live in an age of information overload—connected constantly to smartphones with immediate access to news, social media feeds, stock quotes, and on-the-go trading platforms. Information is power and can make trading easier, more accessible, and sometimes instantaneous. It also makes it potentially easier to lose focus.

No matter how long (or short) you've been trading, the market can still trip you up with common trading blunders. Identify these mistakes and break bad habits early. Your P/L statement will thank you.

Common Trading Blunders

Do any of these sound familiar? The first step is to recognize what you are doing so you can right the ship.

1. Fear of getting in. Not taking a trade setup because your last several trades ended as losses. This is a common trading trap—like a deer frozen in the headlights. If you have done your homework, completed your analysis, and the trade is appropriate for your risk level, it's time to break free of this mental roadblock.

Trades are independent of one another. The outcome of the last trade has nothing to do with how this trade will turn out, but traders often make this association," says Dr. Gary Dayton, founder of TradingPsychologyEdge.com. 

2. Incomplete analysis. See a chart pattern and assume it will have a specific outcome. Technical chart patterns cannot be viewed in a vacuum, and they should be compared against other indicators and chart time frames for confirmation. If a trader goes long after spotting a bullish chart pattern without doing a thorough analysis, they have fallen victim to the incomplete analysis trap.

When the trade doesn’t work out, she’s mystified and can’t understand why the chart pattern failed. A deeper look into the market’s background and context could reveal higher time frame resistance right at the location of the pattern. We can’t just see a chart pattern or trade setup without a careful look at the market’s structure and context," Dayton says. Don't jump into a trade without doing complete analysis.

3. Supersize trading position. Newer (and even experienced) traders sometimes fall into the trap of trading larger position size than is appropriate. This can occur after a few losses and is a form of overtrading. Traders fall into the trap of thinking: “if I double up on my position, I can make up for those losses,” and they trade too large, Dayton says. "Usually, this only compounds their problems."  

Battle the Blunders

Use these tips to battle back against these and other common trading blunders that both new and experienced traders face:

1. Develop a complete written trading plan. This is an essential path toward consistent profitability. You wouldn't start a business without a formal written plan. Successful traders and investors approach the markets for what it is—a business venture. Here are items to detail in your trading plan:

  • The markets you will trade
  • The time frames you will trade and analyze
  • Setups you will identify and use for entry points
  • Risk management rules
  • How/when to increase trade size
  • What to do if you experience loss

"Traders without a plan have no map to help them put structure to their trading. Without structure, the risk is very high that they will make random decisions and random actions, and this will hurt their trading," says Dayton.

2. Know your trading process. If you are a day trader, what is your analytical process? Do you review the markets at night and write out your trade ideas for the next day? Identify the steps you will follow on a regular basis. "[The] process should also include a post-trading assessment of your trading performance and the market conditions for that day and the best trades that set up in those conditions. The post-trading assessment helps you learn about yourself and the markets," Dayton says.

3.  Work to improve. The path to trading success is rigorous and ongoing. After the market closes, now is the time to evaluate what you did right and what you did wrong. Did you follow your trading plan, or did emotions take over, leading to a trading blunder? Use a trading journal to track your progress. Dayton highlights three questions you can ask yourself:

  • What did I do well today, or in this trade?
  • Where did I fall short?
  • What specific actions can I take to improve my trading?

Just like any business venture, a well-defined and practiced approach toward trading can help make the difference between profit and loss. Sure, a stock may be trending on Twitter right now, but with a sound strategy in place, you will know the steps to take to analyze if it is the right trade for you. 

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