By Darrell Martin
This series has looked at several of the most common mistakes made by traders when they are new to trading, but actually can happen to traders at any time.
You may have a day where greed steps in, or you feel you “need” to trade to make a certain amount of money. This is when your trading can become sloppy. Perhaps you have a winning trade and decide on the next trade to double your risk again, and you win again. In your mind, you may feel you are doing really well and cannot lose. You begin not to make the smartest trading decisions and hence, are not really trading. Your actions become more like gambling. Do not ever trade out of need and do not trade with money you cannot afford to lose.
You may hate your day job and dream of trading for a living. You want to work for yourself, but you cannot work by yourself. It is important to have social interaction while trading. Get involved in a trading forum or live trading chat room. Interact with others who are doing the same things that you are doing. By trading the same system, you can bounce ideas off one another, which will help you learn and master the rules. One of the best ways to learn something is to teach it to another person. By answering another trader’s question in a chat room, you are teaching and solidifying the rules of the system for yourself.
How many instruments should you try to watch at one time? You might be monitoring too many instruments at once. You may have the attitude that you’ve “gotta be busy–gotta make money”, and if you don’t have eight or ten instruments up at a time, you are going to miss all the best trades. There may come a time when you can watch many instruments at once and be profitable and sane, but it is probably a good idea to start out watching two or three instruments as you learn your system.
Does your trading business have a plan for when to stop for the day? It is easy to let greed step in and watch it walk away with all your profits. A good rule to follow is the five percent rule. It does not matter if you have a large or small account. It simply says to look at your account size at the beginning of the month and figure out five percent. If you are up five percent for a day, STOP. If you are down five percent for a day, STOP. Suppose your account is $1000. The daily amount for the month is $50. You may think you will never increase your account by only making $50, but what if you don’t follow the five percent rule and in one night, you trade and trade and lose $500? Half of your account is gone.
If you stick to the five percent rule for a month of trading, 20 days, with a $1000 account, you will double your account, if you win everyday. Then, with a $2000 account, five percent is $100 a day that you can make or lose. You do not have to trade longer; you simply trade two contracts instead of one. The next month your account has doubled again to $4000. It is all about compounding, sticking to the five percent rule and being patient.
Remember to take the time to learn. Have a trading journal where you analyze your trades. What did you do right? What did you do wrong? What should you repeat? What should you not repeat? Was it a news day and if so, how did it go? Do you want to trade those news events again? You still want to be trading in 12 months, not just 12 minutes, 12 hours or even 12 days.
Learn from your mistakes. Set yourself up for success.