Top 5 Mistakes That Stock Market Traders Make


Traders, in their earnestness to earn winners, end up making a lot of mistakes. One of the biggest mistakes traders make causes their minds to be paralyzed. It is called analysis paralysis. They put up too many indicators and oscillators on their charts and bring in too much information to the extent that their minds are left numb and they are unable to make a wise decision. Usually only one good setup is sufficient to result in a good trade. This coupled with one or two indicators is all that is required to trade any financial instrument.

Another mistake most traders make is that they are unable to accept their loss. Either they end up chasing it with vengeance or avoid entering a trade just out of fear of losing. Trading the markets is a game of winning and losing. What needs to be accepted and remembered is the fact that as long as the losses are smaller and the gains are greater the net result will be positive.

Many traders have a herd mentality like a flock of sheep that follow each other. They enter a trade because the majority is in that particular trade or they choose a direction which most feel is the correct direction. So instead of studying and analyzing their trade they simply follow the majority. But what they fail to understand is that 90% of the people in the markets end up losing money and only a small percentage of traders are consistently making money from the markets. This is another mistake which leads to failure.

Overtrading is yet another big mistake which goes unnoticed by many traders. Instead of finding the ultimate setup to trade they jump into every possible trade and try to capitalize on everything that is moving. This leads to a result which is contrary to his expectations. Instead of making big profits he ends up making huge losses. A trader should identify good setups and patiently wait for them to occur instead of trying to catch everything that is moving.

Last but not the least, back-testing a system over a short period of time results in one presuming the correctness of the system and the trader starts believing that if the system works in the recent past it must have worked earlier too. In other words, the sample time duration for testing the system is too small and hence when the system tends to fail, the trader is unable to understand the reason behind it. A system should be back tested for a greater time period so that it can incorporate the various events and price reactions to those events.

Improvisation and critical self-evaluation strengthens a trader psychologically and thus results in profitable and consistent trading.

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