5 Trading Habits to Adopt and Avoid
Getting started in the markets can be frustrating, intimidating, and overwhelming. There is a lot of information out there regarding trading and there are a lot of potential mistakes a new trader can make in the beginning if they aren’t aware. Learning to avoid common mistakes and adopt certain practices, in the beginning, can be a game-changer and will save an investor not only money but valuable time. In this article, we will address some common fallacies to avoid as well as good habits for beginners.
5 Habits to Adopt in Trading
1. Find Your Own Setups
Traders need to be able to focus on setups that make sense to them. A common mistake is blindly following the advice or trading strategy of a friend or someone on social media. If you rely on another person for entries, exits, and signals you will likely never learn to identify what they may miss.
2: Be Patient
You’ve found a setup you like; you've identified your entry, take profit zone, and stop zone (if you're using one) and you have your strategy in place. Now you have to exercise patience. Set alerts for when your setup enters your entry zone and move on, don’t make the mistake of going against your trading plan simply because you want to get in early.
Wait until the setup is complete before entering. If the trade goes against you or doesn’t meet your criteria for entry, simply move on to the next trade. There are opportunities every day, it’s best not to dwell on one failed trade and miss other opportunities.
3. Start Small
If you want to succeed at trading, first make sure you don’t fail. Every trade does not need to be a home run, if you focus on only making massive profits in the beginning with every trade you are more likely to fail. Smaller profits compounding over time will help boost your confidence and build your portfolio and skills to the level where larger trades are common. Learn to walk before you try to run a marathon.
Small trades are the best way to live test trading. Smaller profits and limiting losses will help to build good habits that will carry on to larger trades and profits in the future. Aiming to get rich overnight by leveraging your entire portfolio is the best way to burn your account. Understand there is a difference between implementing a trading strategy and gambling.
4. Trade Hot Stocks/Sectors
Stocks move based on current trends. Short-term traders know to look at these trends. Identify what stocks are up or down heavily for the day, or week, set your levels, and enter when you have confirmation. A good strategy to implement for scalpers or day traders is to take advantage of the morning pump. Get in and get out for a quick profit during the first 15–30 minutes of trading.
Keep in mind sectors have their own movement. You should take a sector’s appeal into account in your trades. If you find a sector that you like but don’t want to trade an individual stock in that sector, consider an ETF for that sector.
5. Pay Attention to Other Traders
This is basically what trading is built on, indicators and key levels are used by traders across the world to get in and get out of a stock or equity. If you see multiple traders looking at the same stock or sector, there is a good chance there is something to that. Identifying key levels and communicating with other traders will help you to become a more profitable trader and to identify potential plays that you may have otherwise missed.
Using Volume Weighted Average Price (VWAP) as an example, it is one of the most popular technical indicators. VWAP shows the price that a stock has moved the most volume on. By using a VWAP strategy you will be looking at the same price levels as traders across the world.
5 Trading Mistakes to avoid
1. Trying to Outsmart the Market
Keep this in mind, you are entering the world’s largest casino and competing with some of the brightest minds on the planet, if you attempt to outsmart the market you will likely get burned. The brutal truth is that the market does not care about you, if you are arrogant and try to outsmart the market, the market will humble you and it will humble you quickly.
Remain humble and work on your trading psychology, the best traders are the humblest and understand that no one outsmarts the market long term.
2. Fear of Missing Out (FOMO)
Fear of Missing Out (FOMO) is one of the most common mistakes in trading. You see a stock rallying that is up significantly, fear missing out on the profits, so you enter the trade, and immediately the trade goes against you. If a stock is up substantially and you have missed an entry simply move on, do not make the mistake of chasing. There are opportunities every day in the market, you will have another chance.
3. Overtrading
New and intermediate traders can fall victim to overtrading. The truth of the matter is that you don't need to trade every day to be profitable over time. If you can’t find a good setup or the market seems choppy, take the day off. If you find yourself entering a trade, simply to enter a trade you have made the transition to gambling. You should not enter a trade on a whim without having an entry, exit, and stop out established. Keep in mind, many of the most successful traders in the world do not trade every day.
4. Cutting profits too quickly
Unsuccessful traders are likely to close positions as soon as they are slightly profitable. While this is ok to do occasionally, a better strategy is to let profits run or to slowly exit. Successful traders let winning trades run as long as they are going their way until they reach the pre-established profit target, only closing a position when the strategy dictates taking profits. Ride your winners and cut your losses. With that being said, traders should have a pre-established level where they will take profit. Remember, pigs get fed while hogs get slaughtered.
5.Not Cutting your Losses
You are going to have losses in any market, it is something that simply can’t be avoided. How much you lose is up to you. The best traders manage their losses and keep them to a minimum by cutting losses quickly and moving on. Don’t make the mistake of holding on to your losing trades in hopes of recovery unless you are implementing a longer-term trading strategy. Cutting losses quickly and moving on can mean the difference between a 5% loss and a 70% loss. Remember that small losses are easier to come back from, a series of large losses can take months to recover from.
