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4 Trading Pitfalls to Avoid

Learn how to recognize some of the common pitfalls of trading and techniques for helping you avoid them.

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It is important to recognize some of the common pitfalls of trading and the emotions—euphoria, fear, excitement, anger, greed—that underlie them.

Analysis Paralysis—Fear

There is a quest by many for that perfect trading strategy. That search can lead to numerous systems, rules, newsletters, software, and studies; some of which will contradict one another. This mass of information can paralyze you; there is just too much to consume. A successful trader will need to identify what resources fit best with their trading psychology.

Knowledge may be power, but that does not mean that five, or fifty, trading systems are better than one. Find a system that makes sense to you and supports your trading objectives. Then, focus on setting reasonable expectations, managing risk, and evaluating your results. Make adjustments as you learn more over time about what works or doesn't work for you. 

Decide how much is enough for profit and loss before a trade is placed

Chasing Big Wins—Euphoria/Greed 

Some traders believe that making money calls for home run trades. Maybe they have a friend who bought something for $10 and sold it for $200. People love to talk about their home runs while not mentioning their strike outs. Trading is usually much more of a grind. Many seasoned traders look to hit singles and doubles vs. swinging for the fences. 

People can still long for the 'lottery trade' that will mean early retirement, but this is a trap. Things that position a trader for big wins may also expose them to big losses. It is far better to manage risk and try to keep losses small. One way to keep this big trade hunger in check is to decide how much is enough for profit and loss before a trade is placed.

Explore the use of moving averages and other chart patterns and technical indicators with Lee Bohl, CMT, every Tuesday and Thursday live, on "Charting the Markets".

Revenge Trading—Anger

Losing money hurts...badly. But, making it personal can be dangerous. Some traders who take a loss on a stock will want to get it back, as if that stock were a person who stole their money. Let it go! The stock did not intentionally act against you – you just had a losing trade. Revenge trading hurts the trader much more than the stock in question. You are likely better off with a fresh start trading a new stock than trying to get even on a stock you just misread once. Don't make it personal.

Over-Trading—Euphoria/Greed

Being serious about trading doesn't mean you have to trade every day. In fact, being serious about trading can mean frequent "no trading days". People who think they need to trade daily will often lower their standards, chase the market, force trades, or some combination of all three. Review your trade history. More activity does not necessarily result in more success. Ask yourself the following: Does this trade fit my rules? Does it make sense with my other positions? Am I uncomfortable doing nothing? Am I trading just for the excitement? 

Conclusion

It is common for every trader to see in themselves some of the characteristics highlighted in this article; we are all human. The key to overcoming them is to be aware of the role they play in your trading and to keep them from hurting your trading portfolio.

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