The 7 deadly sins of trading you must avoid to stick with a winning strategy.
- The first sin is moving your stop further from your entry price, because it is close to being activated. Many traders commit this sin as they cannot face taking a loss.
They imagine the market is just about to turn in their favour and if they just move the stop a little they will not have to crystalise the loss. Running your losses is never the right thing to do.
- The first sin is moving your stop further from your entry price, because it is close to being activated. Many traders commit this sin as they cannot face taking a loss.
- Adding to a losing trade in the hope prices suddenly turn around in your favour. this is worse than point 1!! Adding to a losing trade can only amplify the potential losses.
There is nothing wrong with averaging in to a position if this is the original plan. However adding to a losing trade in the hope of a rebound in prices is not a long term winning strategy.
Successful traders make discipline a habit & control losses.
- Risking more than 5% of your account on one trade. (I recommend only risking 1% but many traders cannot stick to this amount). If you risk 5% (or less) of your trading capital on each trade you can
withstand 20 losing trades before you are out of business.
Making as much as 5%+ on a trade is a very big return and when compounded quickly makes for an enormous return. Therefore you do not need to and should never risk more than
5% of your capital on one trade. Trading too big also clouds your judgement, especially when the trade starts to go against you. Keeping each trade to within a manageable amount should stop you from panicking.
- Losing more on a trade than the amount you intended to make. Risk vs Reward is probably the most important part of any trade. Never ever risk losing more than you plan to make from a trade.
Even if your analysis & trade selection has more than a 50% success rate, you will find it hard to make a profit in the longer term if you do not limit losses & run profits.
- Letting a good profit turn into a loss due to greed or poor discipline. Think about it – it’s obvious. If you are staring at a good profit on a trade, the very least you should do is move your stop to break even.
This at least gives you a ‘free no-risk trade’. Taking half of the profit can be a good strategy. Many successful traders try to get their stop to break even as soon as possible to create as many risk free
trades as possible each day.
- Varying position size. You believe a trade will be a big winner so you bet more. I find the best strategy is to bet exactly the same amount on every trade. By this I mean the same monetary amount.
Depending on where you set your stop each time this may mean varying the contract size. Vary the contract size but never the monetary amount you risk.
In my experience it is impossible to know which trades will perform better than others and to this day I am still surprised at which trades work and which fail.
- Not setting a stop loss when you enter a trade. The fastest way to destroy your account. You simply must know exactly where you will exit a losing position before you enter it.
Failure to manage money with discipline is the number one reason why so many traders lose everything in their account.
