If you own your own trading business, chances are you want to minimize costly errors. Unfortunately, new and experienced investing and trading enthusiasts make mistakes from time to time, and some of them are costly. Why not make a shortlist of common missteps and post it within view of your monitor? It’s a simple but effective way to keep the most frequent pitfalls in the front of your mind as you make purchases, sales, and trades. Of potentially hundreds of ways to stumble, what are the traps that people fall into most often? They include:
- The failure to practice risk management
- Not maintaining a diversified portfolio
- Not taking practice breaks on a simulator
- Not doing monthly reviews of all your trades
Here are some practical ways to eliminate these typical mistakes from your daily activity.
Trading Risk Management
Everyone who buys and sells securities is exposed to trading risk. The critical point to remember is that you can minimize the potential downside in several ways. Some of the most effective trading risk management tools include stop-loss orders, limit orders, paying close attention to the amount of leverage on every transaction, and more.
Employing powerful tools that lower your overall exposure is a simple thing. Most people who focus on minimizing trading risk learn how to build the tools into their everyday platform. That way, the entire process amounts to a set it and forget it arrangement. For example, some people use a fixed leverage percentage on all trades or set stop-losses at five or ten percent below the entry price.
Strangely, everyone seems to understand the concept of how diversification works to minimize risk, but far too many active investors practice what they preach. There are plenty of theories about how best to diversify. Still, a general rule is to include at least ten different types of securities in a portfolio and never to focus on a single company’s shares.
Even experienced trading pros take regular breaks to brush up their order-execution skills on a robotic simulator. Using fictitious accounts within a simulated environment is ideal for new practitioners to sharpen their reactions, reinforce their understanding of different types of orders, and gain a basic familiarity with following price action during live sessions. Consider spending at least two full-time weeks on the simulator before putting your own money at risk if you’re just starting. Expect to have a few first-timer jitters when you go live with your own capital. But, those hours of practice will give you a solid grounding in how to place orders quickly and get out of losing positions without hesitation.
Review and Adapt
Many complain that it’s plain boring to do monthly trading reviews. Yes, the activity can seem tedious, but it is the only way to uncover subtle ways you’re missing out on better trades. During a month-end review session, many folks are shocked to notice that they regularly break their own rules about position size, don’t get out of losing positions quickly enough, and commit other simple mistakes.
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