A trading mistake is anything you do (or don’t do) that is not consistent with your trading plan or that costs you money unnecessarily. We have established here how severe the impact of mistakes can be on your profitability. Let’s now have a look at some specific mistakes to avoid.
Each mistake has been grouped with other similar mistakes under specific headings. Note that this list is not exhaustive and many traders seem to make up new and ever more creative trading mistakes to limit their profitability.
As you read this trading mistake list, please take action!
When you come to a trading mistake that you know you make or have made, please add it to your trading journal. My suggestion is that you do the following:
- Write down the mistake you make or have made
- Note when and how often you have made this mistake
- Determine roughly how much this mistake has cost you (if you can)
- Write: “By eliminating ________ I will improve my trading system profitability by $_____ per year
- Document the steps you will take to eliminate this trading mistake
- Follow your documented steps!
The reason to take these steps is that you give yourself a fighting chance of eliminating the trading mistake if you acknowledge it in writing and document the impact and a plan to address it.
If you don’t document your mistakes and a plan to eliminate them
you are bound to continue making the same mistakes!
It is my hope that in reading this list you will start to identify some of your own trading mistakes. If you do identify a mistake that is not on the list, please take a moment to share the mistake here so that others can learn from your mistakes. If we all do this then all our readers can help each other improve our trading performance!
Trading System Mistakes:
- Trading without a written trading plan
- Attempting to trade with a system that does not suit you
- Not having a complete positive expectancy trading system
- Breaking trading plan rules
- Not having documented all aspects of your trading plan
- Not having spouse buy-in to your trading plan
- Backtesting your trading system on historical data, but not validating performance on unseen data that was out of the backtest range
- Not having specific entry and exit rules that are not subject to discretion
- Copying someone else’s trading strategy or trading system, which you might not have the psychological ‘stomach’ for or the understanding required to follow through
- Selecting a trading strategy or trading system that does not fit your personality. E.g. Conservative investor trading a volatile system, quantitative person trying to trade based on information flow / news / management information; someone who really cares about fundamentals trying to trade based on technical signals alone
- Making great products the sole criteria for investment in a fundamental trading strategy
- Taking profits early for winners
- Not backtesting your strategy to understand how it performs in all market conditions (up / down / sideways and volatile / quiet)
- Adding to losing trades
Trading System Execution Mistakes:
- Failing to determine the worst case exit point for every trade prior to entry
- Not placing a stop loss for each and every trade
- Deciding to hold a losing trade ‘for the long term’ rather than exiting at the stop loss
- Skipping trading signals from your system because they make you uncomfortable
- Placing market orders in illiquid markets so you end up with terrible fills
- Breaking any rule written in your trading plan
- Placing market orders in illiquid markets
- Paying commissions to buy an instrument that you can buy commission free direct
- Not being patient to get a good price when executing a trade
- Making decisions not covered by your trading plan during the trading day (in most cases these should be made after the close)
- Buying something that is falling rapidly – “Don’t try to catch a falling knife”
- Taking any trade that is not triggered by your trading system
- Not double checking orders before placing them – ‘Fat finger’ problems like wrong price / volume or buying instead of selling
- Moving protective stops away from the current price to “give it more room to move”
- Not buying or selling when the position hits the target price that you determined before entering the trade
Risk Management Mistakes:
- Not controlling the number of correlated positions in the portfolio
- Taking on excessive leverage without understanding of the downside
- Failing to set risk tolerances at a portfolio level
- Trading positions that are so small that commissions are a large percentage (>1-2%) of the trade
- Failing to understand the risk / reward ratio on each trade
- Failing to reduce your trading size when you are losing (for example by not calculating position size linked to amount of equity)
- Buying an investment vehicle when you don’t know how it works
- Trading too many systems that are essentially benefiting from the same profit drivers (much better to have systems benefiting from different profit drivers)
Psychology Mistakes In Trading:
- Trading when you are emotionally compromised (births / deaths / marriages / divorces / moving house / lost job etc)
- Letting any form of emotion into your trading (during trading system development or execution)
- Trusting your emotions or gut when they are telling you to break one of your trading plan rules
- Making decisions like “This company has awesome products, therefore I must own the stock”
- Seeking (or getting) any form of excitement through your trading
- Following the herd (making an investment or trade because others are doing it)
- Risking more (or less) than your trading system says you should for a particular trade
- Letting losers ride hoping they will come back to your target loss or to break even
- Not keeping a trading journal
- Allowing yourself to be sloppy in your trading when you are doing well
- Allowing yourself to be sloppy in your trading when you are doing badly
Financial Management Mistakes:
- Undercapitalisation (trading with too little capital) given your trading system’s largest historical drawdown and your position sizing strategy
- Paying higher commissions than you need to (not shopping around for the best brokerage rates)
- Trading with money that you cannot afford to lose (or that you need to pay bills with)
- Not accounting for taxes, fees and charges
- Trading with a dealing desk who is trading against you
- Believing in efficient market hypothesis (EMH)
- Failing to observe your own mental state while trading
- Failing to realise that you don’t know everything and therefore not looking out for things you don’t know or haven’t anticipated
Eliminating Trading Mistakes:
After reviewing the above list and being truly honest with yourself, the chances are you have identified a long trading mistake list that you need to address… But let’s simplify it right down >>> Download my Trading Mistake Cheat Sheet HERE to learn the top 3 trading mistakes most traders make and how to eliminate them.
Main Trading Mistakes Page: Eliminate Trading Mistakes to Accelerate Returns
Help Us Make Our List Of Trading Mistakes Complete!
Submit your trading mistakes here so that other traders can benefit from your experiences…hopefully you benefit from our experience here too!
Have You Ever Made A Mistake In Your Trading? Help Others & Share Your Lessons!
Have you ever made a trading mistake and learnt a lesson you wish you didn’t have to learn the hard way?
Of course we all have! Pay it forward and help your fellow traders avoid that mistake by sharing it here – then read submissions from other traders so that you can learn from their mistakes – everyone wins!