Traders rely on their knowledge of the markets to make money by buying and selling currencies, commodities, shares and indices. However, not all traders manage their capital well enough to succeed over time. Here are some common mistakes that you can easily avoid: For help avoiding common trading mistakes, visit Saxo markets.
Not using stop losses
The use of stop-losses is an essential part of any trader’s strategy. A stop-loss prevents your trade from going into negative figures for your account, which can occur if your trade begins badly or does not go in your favour. Using a stop loss will ensure that your trade does not go into the red and limit your capital’s potential fall.
Not understanding how your broker makes money
Many novice traders fail to understand what exactly goes on behind their trade orders or if their broker makes any money at all on their trades. It may be easy to assume that they charge a commission per trade, but brokers make money in many other ways. The trader is the one who has to pay for their broker to facilitate their trades, regardless of whether they make a profit from trading or not.
In many cases, traders will also lose because they are unaware that certain assets move against them when using leverage. In other words, the trader borrows money from the broker to buy an asset and cannot repay it before selling it off. If this occurs, the trader may end up paying more commission later due to interest charges.
Many investors seem to focus on what they can gain but take too little notice of what they could lose if a trade goes bad, which leads us onto our next point:
Not knowing your investing objectives
It is essential that before making trades, you have a clear understanding of your objectives. It will ensure that the asset being traded aligns with what you want to achieve and help provide a clear strategy and direction for you to focus on.
If you are trading stocks, the company’s fundamentals must be strong enough to grow in value over time. However, if you purchase a stock due to its low price, which appears too good an opportunity to miss, there is no guarantee that it will move higher. In this case, trying to trade momentum or forecasted earnings could be more favourable since they can easily change from day to day without warning, making trading far less risky.
Not thinking about taxation
Many traders forget that they may have to pay taxes on any gains from their shares when trading stocks. In the UK, for example, investors have to pay capital gains tax on any profits made from selling off or cashing in their investments. It can be a large sum to pay if you buy an asset at a much lower price which then shoots up in value, so it is advisable to speak with a financial adviser beforehand.
Trading against yourself
If you are day trading and buying and selling contracts within a few hours, this will often take place in different time zones, which could cause your orders to go through while the markets are closed. It means that the second order will execute against the first position before it has been filled, which rarely goes well.
Not keeping learning and practising, traders who succeed continue to learn and practice their skills by watching the markets for hours on end, analysing charts or practising with virtual money. This way, they can become better prepared if their trades go wrong, which will help them remain calm under pressure.
It’s essential to have a firm grasp on the intricacies of market trading before you get started. Determine what works best for you, especially if you’re new to the game. However, the learning curve will be considerably shorter if you can avoid these most common trading mistakes while beginning your financial market trip.