The primary trading pitfalls. How you can avoid them

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The primary trading pitfalls. How you can avoid them

Trading on the financial market is associated with high levels of emotional pressure put on traders. This is largely due to the specificities of the market, such as the financial risk, difficulties forecasting the future and so on. Therefore, there are an array of common pitfalls that many traders fall into, especially beginners who have just begun learning about trading on the financial markets.

Due to this gravity of this topic, we decided to dedicate an entire article to this alone. Further on we will cover the most widespread and inconspicuous psychological pitfalls in trading, as well as go into ways to combat them. Being aware of such vulnerabilities at times increases the likelihood that you will successfully make the journey from a beginner to a professional trader.

Psychological pitfalls in trading

When we asked some successful traders what the secret to trading was, we got a variety of answers. However, they all had one thing in common. Every expert exchange-trader of any kind made sure to emphasize the importance of psychological factors. And professionals agree that 90% of market success is based on how a trader relates to trading. They mean namely their mental state. The trading systems used, the indicators, the methods of managing capital and so on are all secondary. Therefore, we begin this article by considering the most wide-spread psychological pitfalls. For starters, we will list them, then go on to consider each of them individually.

• Paying too close attention to the chart and open trades.
• Holding on to losing trades too long in the hopes of market reversals.
• Fixing the profit at an inopportune time in the hopes that the trend continues.
• Trying to recoup lost funds to compensate for the loss of a deposit.
• Leaving the market too soon out of the fear of a profitable trend ending.
• Losing control and treating it like gambling, relying on luck rather than a trading system.

The points listed above have an effect on the trading process itself. The common cause all of this is the inability to keep emotions under control. When traders start to consider things logically and through reason, they accurately evaluate the situation.

However, human intuition is the leading advantage people have over robots. If this wasn’t the case, automated systems would have long replaced traders, as they are completely free of emotions and exclusively act in accordance with their algorithm.
That hasn’t happened, because the famous 20/80 formula is in play. Only 80% of your success is determined by your trading system, the remaining 20% is the intuition of the trader themself, the person (not a robot) trading on the financial market.

As always, the truth is somewhere in the middle. Although it can clearly be said that all experienced traders carefully control their emotions, at the same time they don’t ignore their intuition. If you base 80% of your trading decision on cold calculations and 20% of it on intuition, then you will fall within the range of norms. Conversely, is 80% is emotion and only 20% or less is market analysis conducted through your selected trading system, then you are no longer trading, you are gambling.

Closely monitoring open trades

This mistake is very common among beginners. It goes as follows. A trader opens a trading operation and is literally “glued” to the terminal. They follow every minor price fluctuation and worrying about even short-term price corrections in the “wrong” direction.

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There is a general rule that traders should conduct their market analysis before placing trades, not after. Once a trade has been placed, in all honesty, you can close the terminal and go on with your life. This should have no effect on the operation’s results. After entering the market, closely following every slight price fluctuation will only destabilize your mental state.
The idea that this helps “control the situation” is an illusion. It is very easy to avoid this pitfall, there is no point excessively concentrating on the market as it won’t sway the final result.

That being said, there are several nuances. When trading with fixed (Buy/Sell) contracts, there is no point opening the trading terminal at all as many platforms won’t allow you to close trades prematurely. For example, on most platforms, you can’t close classic or turbo contracts prior to their expiration. That being said, you can when CFD trading. Contracts based on price difference run on the principle that, as do Forex trades. Therefore, if you trade on a specialized CFD platform, then you need to follow the market so as to fix the profit or limit the loss in time.

Retaining losing operations and closing trades early

To clarify, this is applicable only when trading with contracts that have open expirations, meaning that trades can be closed at any point (for example CFD or Forex). The essence of this pitfall hinges on the common feeling of intense fear of losing money. In the first case, the trader runs a losing trade too long. The market moved in the “wrong” direction, however, the trade remains open in the hopes that soon the trend will reverse and recover the losses.

The situation is reversed when the price is fixed too early. When a trade has been successfully placed, however, it is closed prior to the planned point in time, or when a certain amount of profit has accrued. The reason for this is again due to the trader monitoring the trading terminal too closely and, in a moment of fear, they become convinced that there will be a global market reversal, motivating them to close their order.
The way to combat this pitfall is also very simple. You need to clearly outline a plan in advance and strictly adhere to it. Losing operations should be closed either by a stop loss or manually as soon as the predetermined loss has been reached. The situation is reversed with profitable positions, although a trading stop mechanism is typically used, i.e. a flexible stop loss after the position becomes profitable. If the trading platform doesn’t provide automated stops, then it can be done manually. In the latter case, closely monitor the terminal, it isn’t a psychological pitfall when it is necessary for trading successfully.

Gambling and the scramble to win back funds

This more insidious psychological pitfall is the reason that the majority of beginners lose their deposits. The moment you start to leave trading to fate, rather than follow a system (regardless of if you’ve worked it out yourself or it is ready-made), you’ve gone down a direct and swift path to financial loss. Besides, you won’t gain the usual experience from losses that you get when you adhere to a trading system.

Losses are inevitable. “Only someone who does nothing will make no mistakes”. Absolutely every professional has gone through this to achieve success trading on the exchange. In the beginning, it is completely normal. It can be considered as the price of learning. The money could go to an official trading course or to the financial market. In essence, that’s it. In this one case so long as beginners increase their level of experience it is justified.
The most important thing is that the trading system is strictly followed. If the situation has unfolded, it is worth analyzing it. That being said, never in any case whatsoever try to recoup previously lost deposits by increasing your stake in trading investments. Here we would recommend several practical approaches, those being:

• it follows to concentrate on the trading results (+/-), not on the total profit generated;
• measure your profit and loss in percentages, not in any concrete currencies;
• don’t use the Martingale method (doubling investments following losing trades), the focus needs to be on producing a higher percentage of profitable operations than losing;
• it is helpful to set a limit on the total number of trades or losses/profits per trading day, once that point has been reached, immediately stop trading.

Beginners only have to look at the Forex PAMM account statistics to be convinced that losing deposits is a normal occurrence. There are many examples where professionals consistently experience 5-30% deposit loss and still, at the same time, generate a significant profit. This is why if you have a bad trading day, it is worth taking a break and leaving trading to another more profitable time.

That being said, it is recommended that beginners start out on a demo account either way, because in the initial stages, due to a lack of experience, losing money is practically a guarantee. If only because of their inability to properly take advantage of their trading terminal. Some of trading platforms, for example, offers an unlimited demo deposit, around 100 choice strategies, dozens of video courses and easy opportunities to effectively educate yourself. After you’ve achieved strong results on a demo account, you can switch over to a live account. The minimum deposit is only $10 dollars, meaning you don’t need to risk much.

Fatigue, stress, and frustration

Since we’ve gone through common psychological pitfalls in trading, we’ll move on to a more general topic, although no less significant. The problem of fatigue in trading. Trading on the exchange is an intellectual endeavor. The prolonged mental strain from such a high level of emotional stress can quickly lead to a so-called “burnout”.
Such a state is characterized by a general decline in liveliness. In particular, our abilities to do intellectual tasks suffer. It becomes difficult to analyze and make balanced decisions, both of which are necessary to trade successfully.

In the majority of cases, burning out is another common trading pitfall, which is very much better avoided. Therefore, it is important to follow your trading regime, don’t get unnecessarily worked up, and relax when you can. Stress is relatively normal for people, so long as it doesn’t become pathological. Burning out is a relatively serious threat to your regulatory system, even more, decapacitating than your ability to work.
Factors that contribute to frustration:

• becoming a workaholic – You can’t spend 100% of your free time trading, you need to leave time for other important parts of your life;
• chronic sleep deprivation – high levels of stress can lead to insomnia, this is one of the reasons that it is recommended to trade at night;
• a pessimistic outlook – we get what we expect, or rather, we subconsciously fulfill our own prophecies;
• excessively concentrating on past failures – the past should stay in the past, continuing to punish ourselves for past mistakes can won’t lead to anything good.

How traders keep themselves together

I doubt that the well-known advice to get at least 8 hours of sleep a day is news to anyone. It, of course, is true, so there is no point giving any further recommendations. Therefore, let’s jump to considering a question related to trading.

Our main practical advice. It is worth taking trading a bit more “lightly”, although doing so measured and intelligently. The secret to trading coldly and calmly is to psychologically prepare yourself in advance for the worst-case scenario.

In reality, it is a psychological trick to work through difficult emotions necessary for making key decisions. You will see for yourself. Once you start worrying less about possible losses, then these negative scenarios will happen less often than in the reverse situation. It has a common sense explanation, as a calm mind is more capable of generating more accurate forecasts.
Trading is not a game, it is a professional sphere of activity. It is completely realistic to achieve success with it, as a significant number of people know too well after years of earning profit from exchange trades. That being said, nothing worth having is easily obtained. It takes time and effort to learn any profession. If you act carefully and meticulously, then you will surely teach yourself to trade profitably with either minimal loss or completely free from it using a demo account.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

Trading System Pitfalls and How to Avoid Them

Traders following a trading system need to be aware of some of the associated pitfalls that can seriously impact the profitability of their trading. One of the most important pitfalls to avoid consists in failing to follow the system properly under all optimum trading conditions.

Major Pitfalls to Avoid

Below find listed some of the more common pitfalls traders experience when following a system:

  1. Failing to Enter a Signaled Trade – a trader may have many reasons for not taking action on a trading signal. Nevertheless, by failing to act on a trading signal, the trader might be missing out on a profitable trade that could have earned them significant profits or made up for past losses.
  2. Taking Trades Without Entering a StopLoss Order – many traders assume they can watch their levels without entering a stop-loss, and get out in time. The currency market can easily exceed any level in the blink of an eye, and often does when significant economic data is released. By simply placing a stop-loss order every time the trader takes a position this situation is easily avoided.
  3. Taking Trades Based on Outside Factors – entering into trades which provide excitement or some other emotion can seriously undermine a trader’s success, especially if the trades are taken outside of the trader’s system. Also, listening to recommendations by other traders and taking trading suggestions outside of the trader’s system can cause additional problems. This foible can be especially negative because it allows the trader to blame the external circumstance for their losses.
  4. Using too Many Systems – keeping an eye on too many indicators can lead to confusing trading signals, which in turn could lead to unprofitable trades. The problem arises in the compromise of the trader’s ability to focus and interpret the signals accurately, having too many signals to interpret. Keeping it simple and limiting trading signals to a few reliable ones can increase the likelihood of entering profitable trades.
  5. Trading with Excessive Risk – taking positions which may compromise the account has been the quickest way for some traders to go out of business. With the amount of leverage available in the forex market, the level of risk must be carefully watched. Assessing the optimum size for each position and only allowing a certain percent of the account to be at risk at any one time will assure a trader’s longevity. Never risk money you can’t lose.

ForexNewsNow.com offers realtime forex news and analysis for all the major foreign currency pairs and provides a comprehensive selection of information for forex traders and enthusiasts of all levels and backgrounds.

About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts. Yohay’s Google Profile

Market Masters: Ten Common Options Trading Pitfalls To Avoid

Too many new traders see stock options as lottery tickets, chips in a casino, or a path to getting rich quick. They are not. They can be used as tools for the transference of risk from one person to the other. They can be used to buy insurance on a portfolio of stocks. Options can even be used in place of margin when a trader wants to apply leverage to a trade. However no trader should start trading options until they have been educated in how their pricing model works and the dangers and pitfalls of trading them.

Fish see the bait, but not the hook; men see the profit, but not the peril. – Chinese proverb.

When trading options you must understand how much risk lies in your specific option trade and what the odds are of its success. The Black-Scholes option pricing model does an excellent job of pricing in known variables of time and volatility into options. The pricing model works best the closer an option is to expiration but the accuracy of pricing gets more fuzzy and unpredictable the farther out an option is to expiration. Implied volatility does not predict direction of the movement it projects the amount of movement possible before expiration.

Option traders really have to understand the concepts of Delta capture so they are rewarded for being right directionally and also the potential for Gamma to play a part in big wins buying options or huge losses selling options based on the probabilities of an option expiring with intrinsic value. If the trader does not understand these concepts they need more homework before they trade any options.

There are a few ways to have an edge with trading options: #1 Following the chart and trading in the direction of the trend using options. #2 Always manage your risk on every trade allowing your wins to be bigger than your losses in the long term. #3 Many option traders make the mistake of trading too big with options; all the same rules of risk management apply to options as they do for stocks. Don’t catch lottery fever and blow up your option trading account. #4 You can convert a winning stock trading system into a winning option system by using options for robust entries in place of stock. #5 it is possible to design a high winning percentage system selling options but I would advise credit spreads over naked options. Option trading is no different than any other kind of trading, just more leverage and speed of movement.

  1. The first question to ask in any option trade is how much of my capital could I lose in the worst case scenario not how much can I make. You can lose a high percentage of the capital you have in an option trade so keep it small in comparison to your total account size. I suggest never risking more than 1% of your trading capital on any one option trade.
  2. Long options are tools that can be used to create asymmetric trades with a built in downside and unlimited upside. The leverage is already there, if you position size correctly based on the normal amount of shares you trade you will stay out of a lot of trouble with losing a lot of money.
  3. Options should only be sold short when the probabilities are deeply in your favor that they will expire worthless, also a small hedge can pay for itself in the long run creating a credit spread instead of a naked option with unlimited risk exposure.
  4. Understand that in long options you have to overcome the time priced into the premium to be profitable even if you are right on the direction of the move.
  5. Long weekly deep-in-the-money options can be used like stock with much less out lay of capital to capture intrinsic appreciation in the underlying stock.
  6. The reason that deeper in the money options have so little time and volatility priced in is because you are insuring someone’s profits in that stock. That is where the risk is: the loss of intrinsic value, and that risk is on the buyer of the option contract.
  7. When you buy out-of-the-money options understand that you must be right about direction, time period of move, and amount of move to make money. Also understand this is already priced in.
  8. When trading a high volatility event that potential price move will be priced into the option, after the event the option price will remove that volatility value and the option value will collapse. You can only make money through those events with options if the increase in intrinsic value increases enough to replace the Vega value that comes out. This is why it is so hard to make money when holding options through earnings, the move is already priced in and that extra value is gone the next morning the options open for trading.
  9. Only trade in options with high volume so you do not lose a large amount percentage of money on the bid/ask spread when entering and exiting trades. You have to find those few option chains that have the liquidity to trade with spreads measured in cents not dollars. A $1 price difference in the bid/ask spread will cost your $100 to get in and out of a trade on top of commissions. Also be aware that the best liquidity is in the front month at-the-money options and option chains get more illiquid as they go deeper in-the-money or out-of-the-money this has to be considered in a winning trade because you might have to roll the option to a more liquid contract. Most options chains can’t be traded due to the fact that they are just not liquid enough.
  10. When used correctly options can be tools for managing risk by limiting capital at risk exposure and capturing huge trends, used incorrectly they can blow up your account.

Options are great tools that can be used to build up your trading account if you’re trading them right. If trading them wrong you can quickly lose your trading capital to slippage, bid/ask spreads, and the sellers of option contracts.

Forget the cheese; just let me out of the trap!”

About Steve Burns: Steve is an published author and long time blogger via his site NewTraderU. He is an avid options trader and trend follower. Follow Steve on Twitter: @SJosephBurns

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