Often a great deal is made of the need to follow the time tested trading rules should you wish to achieve any level of trading success. It is also a widely held view that a lot of traders starting out invariably make a lot of mistakes.
It is unofficially ranked as the most important trading rule, and one of the biggest mistakes that traders make is to not cut a loss. This problem is often compounded by committing a great deal of money (if not close to the entire trading capital) into the trade initially.
To the defence of all those who have at one stage or another not cut a loss, it is a perfectly natural thing to do. Deep down, the last thing a person wants to do is consciously make a decision to lose money when there is a chance that you won't have to lose the money at all.
There is often a touch of excitement and optimism when traders begin trading and the thought of cutting a loss does not complement the prevailing emotions in a person and therefore it is the last thing that people want to do. Furthermore, the main reason why people trade (whether right or wrong) is for money.
People trade because they believe there is a chance that they could realise more money than they could have ever dreamt of. In the eyes of a beginner, obviously cutting a loss does not support the aim of making lots of money because it is realising a loss of money, and denying yourself the chance of breaking even in the trade.
Hand in hand with the biggest mistake that people make is the mistake of not letting your profits run.
Again, to the defence of those traders who do cut profits short, it is a perfectly natural action to see a profit and to do everything in your power to realise it and protect it.
Remember, the main reason why a lot of people trade (and therefore it is their primary focus) is to make money. Consequently, any action that secures a profit and places more money back into the account than was taken out initially to open the trade, is a positive step.
The share price of many companies will double, triple and more in less than 12 months and potentially, a position in one of these in a year will achieve your expected returns in one foul swoop.
Letting a profit run is important yet it is extremely difficult to do. Most people do not have the patience to allow a position to remain open for so long and therefore risk the unrealized profit disappearing.
People will also cut a profit short because they know that closing the position will reassure them that they are trading well and it will help their self-confidence. It will make them feel good about their trading whereas an open position, even though it may be in profit, still has an air of uncertainty about it and where it may end up.
This uncertainty is sufficient to only provide a small degree of confidence and therefore the trader is again tempted to close the position early in order to feel good.
There will be periods of time when the number of potential trades available to you are significantly reduced from your average. This could be due to a number of different factors however it is important that you don't force the action and look for opportunities that really aren't there.
Inexperienced traders can easily be swept away by the excitement of their new endeavour and be too keen to trade. A measure of restraint and calm is a positive influence on a new trader especially when the overall market may be drifting lower and the number of opportunities drying up.
New traders would be advised to remind themselves that their trading plan is designed to keep them out of the market rather than get them in. This shift in thought will emphasise the need to only enter a position when all of your conditions have been met as opposed to entering a position because it is the 'best of a bad bunch' and you don't think you have enough positions open.
Never give tips and never listen to them. If you are ever inclined to act on a tip, ensure you conduct your own analysis and if the potential trade and prevailing conditions do not match the conditions detailed in your trading plan, don't bother with it. New traders can be easily swayed by tips because it provides an easy way of identifying a potential trade.
New traders will lack competence and therefore lack confidence in their own ability and their trading plan, if they have developed one. This lack of confidence will make them easy targets for tips.
If on the other hand, you provide a tip to someone else, it can also have negative consequences. When you give a tip, and the position moves against you, it is possible to feel some obligation to stay in the trade yourself, because of the relationship you have with the person you gave the tip to. This is especially when the person receiving the tip doesn't have a great understanding of the markets and certainly doesn't understand the importance of cutting losses.
It is unlikely that you could face up to the person one week after the position was entered, and tell them that the tip is no good and they should exit. It would be an awkward position because not only would you have to accept yourself that you got the trade wrong, you would also have to admit to the other person that you got it wrong compounding this challenge that many new traders face.
New traders can often be swept away by the opportunities that markets present every day and it can be very easy to commit a large amount of capital into a single position. Along with not cutting losses, this mistake can be a single reason why people lose a lot of money and give up trading.
Never let your enthusiasm for a potential trade influence you to commit too much of your capital into a single trade because if the trade moves against your anticipated direction, it can be difficult to recover from.
Develop A Trading Plan To Tame The Markets