Common missteps in trading and how to avoid them

Over-trading, not knowing when to cap losses and analysis paralysis – what do all these typical trading mistakes have in common? Nick Hall, co-founder of Stocknet Institute, believes these errors stem from traders needing more guided space to learn and grow before hitting the live market.

The most common forex trading mistakes stem from a lack of preparation, experience and strategy. Not being well-informed about how the financial markets work, what factors impact performance and risk, and unclear style, preferences, or strategy can directly lead to things like over-trading, not capping losses, and analysis paralysis.

Trading is a hard enough business for experienced traders, but novices have an especially difficult time learning to navigate the market due to a lack of proper guidance. Many get their investing information from friends, family, and the Internet rather than official sources, which contributes to a fundamental misunderstanding of financial markets and trading concepts.

Retail trading experts and platforms have a responsibility to help educate traders of every level and explain to them how to avoid certain mistakes successfully. Here are a few examples of common trading missteps and how to avoid them:

Forgetting to do your homework

Many people are drawn to trading because they think its low barrier to entry means that it’s an easy way to make money without much time and effort. This could not be further from the truth.

One of the biggest mistakes that traders of all disciplines make is not doing their homework – on how the markets work, the different factors that can affect pricing and risk, the different strategies and styles of trading, and the support tools available.

Nearly 31% of retail investors turn to more than three sources for information on what to invest in – showing a real appetite for guidance and education when it comes to trading.

Forex trading in particular is difficult because currency pairs are linked with national economies, which can be impacted by any number of social, economic, and political factors at any given time.

Knowing what type of news to monitor, what potential predictors to watch out for, and keeping on top of economic forecasting are all things that traders must intimately know if they want to avoid poor trade choices.

Trading without a strategy

Along with doing your homework, it’s crucial that traders set a strategy before they start tinkering with live trades. It’s unreasonable to expect anyone to monitor markets and react efficiently 24/7. That’s why creating a strategy with a clear goal, a pathway to that goal, and protection against potential pitfalls along the way is crucial.

Strategies can include safety nets to avoid unnecessary risk such as hard, pre-determined stops to help traders get in and out of the market at pre-determined levels.

Cutting winners early, and keeping losers too long

It’s also common for inexperienced traders to ‘cut’ winning trades too early because they want to secure a profit. Alternatively, they may let losing trades run for too long. Losing money isn’t great in itself, but not knowing when to ‘get in’ or ‘get out’ can impact the overall outcomes of an investment strategy.

Understanding when the market has reversed and your set-up is no longer valid should be a key element of your strategy. Predetermined stop-loss levels without exception, can help traders avoid this mistake

This is also where we see the emotional side of trading come into play as well. Admitting defeat can be tough but it’s much better to lose a small percentage than waiting too long and losing too much that it upends your whole approach

Trading with your emotions

Especially for those new to the trading, when things don’t go well it can be really difficult to set aside emotion and make rational decisions even if there is a pre-determined strategy.

Beyond the unpleasant emotional and psychological impact this can have on the traders themselves, ‘emotional trading’ can cause investment outcomes too. Unbridled emotion can lead to cognitive biases, impulsive decision-making, and loss aversion, which can completely upend a rational and methodical strategy.

Some traders may end up conducting too many trades out of boredom. This is a common pitfall of those who have no larger plan or rules for themselves, simply a desire to ‘get going.’ Overtrading more often than not leads to disjointed outcomes and high commission costs, and is ultimately counterproductive to a trader’s investment objective.

Not learning from the past

Traders could avoid all these common mistakes and still miss out on evolving and improving if they don’t continually reflect on their strategy.

Neglecting this is especially easy when you’re enjoying a winning trade, but you can often learn more from your losers. Analysing what went wrong the first time helps you to avoid the same mistake again and again.

While the traders themselves obviously bear some responsibility in studying up and preparing before they take their chances with a live market, many of these ‘easy’ mistakes could be helped if the trading platforms ensure that they offer the proper education tools. For example, in-platform analytics with real-time news and data, free educational content, real-world simulators, and access to expert advisors could be extremely useful.

A recent survey by the World Economic Forum found that 74% of retail traders would trade more if they had more opportunities to learn about investing. 67% said they would invest more if they had more trust in their investing platform.

There’s a real need for the retail trading industry at large to better support new traders in their navigation of live markets. Offering an educational, lower-risk practice environment could be the best way to combat these common mistakes.

About Stocknet Institute

Stocknet Institute (SI) is a UK-based financial technology firm that offers retail traders a lower risk virtual funding environment, SI World, where they can develop their skills and earn rewards before entering a live market.

Originally opened in 2021 as a trading consultancy, SI today offers traders the opportunity to learn, develop, and earn some extra income without the risk of typical retail trading methods and live trading accounts.