There is an illusion that making money trading is easy. That all you need to do is to learn a setup, open a trading account, follow a plan and the financial goals you aspire to will come to you.
In truth, trading is actually very simple. But success rarely comes as easily as we desire. One of the things we can do to accelerate our success when we are learning to trade is to eliminate some of the key mistakes that new traders often make.
Here are some of the top mistakes to be aware of and how to mitigate them in your trading.
Trading without a Plan
Although we intuitively know that having a plan is important, in our rush to make money, we often try to take a short cut to getting to our goals. Giving in to our desire to get into trades so we can make money before developing a solid trading plan. Your trading plan provides you with the ability to put the probabilities of success in your favor by defining a repeatable process. If you have found yourself taking trades before developing your trading plan, consistent success will be hard to achieve.
Choosing the Wrong Option
Too often as a new trader we focus on the outcome, the money, rather than the process of trading. And though we may see a great setup on the chart, we focus on choosing an Out Of The Money (OTM) option because of its price instead of one that gives a better probability of success. This mistake often leads to a loss even when our read of the chart is correct.
Let’s look at an example of how option choice can affect the outcome. On May 30th we shared a trade opportunity with our members. Using a put to take advantage of a move lower on ALL. Our entry was when price was around $94.24, with target 1 at $92.55, target 2 at $90.30 and target 3 at $87.85.
Choosing a “cheap option” based on it’s price may have had you looking at the 85 put with July expiration. On May 30th, you could have bought it for $0.35.
We chose the At The Money 92.50 put with July expiration and paid $1.43, paying almost 4 times more for the option.
On June 6, ALL made a move lower, quickly moving past target 1 and towards target 2. Our trade plan calls for closing the trade at target 1, so when the alert went off and we say that price was beyond our first target, we sold the put for $2.85, a profit of $1.42 and almost 100% gain on our trade.
And how did the cheap option do? When price accelerated to the downside, the spread on the puts widened showing a bid for the 85 put at 1.00 and ask at 0.01. If we had gotten the mid of the spread we could have sold the put for $0.50, giving us a profit of $0.15 or 43% gain.
Your trading plan should detail how to decide which option to choose that ensures the odds of success are in your favor and provides you with a profit that enables you to achieve your trading goals.
Not Having an Exit Plan
In our excitement to make money, we often focus on setups and entries, becoming super focused on finding the perfect entry. But the truth is, entries are just a way to get into the market. It is our exits that determine our profit, so it is important to create a plan for our exits before we even get into our trade. This is how we set high realistic profit targets based on the movement of the chart and assess how to minimize our risk if the trade goes the wrong way.
Sticking with our ALL example. Without an exit plan, when the price does make a move, rather than focusing on execution to take the profits the market is giving, traders often find themselves trapped in indecision. This is because when we place ourselves in a position of uncertainty, it triggers our survival response which has the interesting ability to shut down rational thought. And without rational thought, we are unable to make clear, informed decisions. When the price is moving quickly like it did with ALL on June 6, many traders without an exit plan allowed the movement of the market to provoke their emotions and it prompted them to stay in the trade to “try to get more”. Then when price snapped back just as quickly, they were left frozen, watching all those anticipated profits evaporate.
Going for the Big Win
Even when we have an exit plan, sometimes we can get caught up in the emotion of knocking it out of the park. Sure, it feels good to make a huge gain on a trade but doing that consistently is very hard to do. The market is constantly moving and easily can move a few percentage points in only a few days, delivering multiple opportunities to earn consistent gains. Often when the market moves to target 1, as new traders, we look at the money, deciding that the profit isn’t good enough, so we pass on it, only to see it trade back to our entry or worse, to a loss. Your trading plan should include a plan for managing your trade that ensures you are capturing gains when the market provides them to you.
This mistake is especially common for traders focused on the outcome of trading rather than the process of it. In the ALL example, for traders who chose to enter the trade with the “cheap” OTM option, the $0.15 profit may not have been “good enough” to satisfy the desire to “make money” and so they chose to hold it instead, also allowing it to go back to an unprofitable trade when the price moved back up.
And even those who chose the ATM option that could have provided a 100% gain on the trade, may have been seduced by the emotions that can come up with the market “looks like” it’s going to give much more, choosing to ignore their target 1 plan to try to “make more money”.
There are many more mistakes that can occur when we are trading, with the above being some of the most common. Developing a well thought out trading plan before taking your trades, will help to focus you and bring clarity to your trading so you can minimize the impacts that mistakes like these can have.
As a member of Learn to Trade, we provide education and support for developing a profitable trade plan and minimizing mistakes like these so that you can achieve trading success.
For almost 20 years we have been providing in depth training that has empowered more than 4,000 people to successfully use trading to achieve their goals. Our lifetime membership enables you to progress at your own pace. You can repeat any part of the weekend program as often as you choose so that you can master using technical analysis or fundamentals and each month there are additional tutorials and hands on trainings to further enhance your skills.
Our goal is to provide you with the knowledge required to begin trading confidently combined with a professional and supportive trading environment where you can interact with other traders and staff.
If you’ve been thinking about using trading to add to your investment portfolio or supplement your income then we’d love to support you.
To learn more about Learn-To-Trade.com’s stock market trading course, contact us at 416-510-5560 or by e-mail at email@example.com.