Key Takeaways:
- There are many pitfalls beginner traders fall for
- Emotions can cloud judgment and lead to irrational decisions
- Leveraging isn’t understood enough
- Beginners don’t use stop-loss orders and aren’t ready to cut losses
Many traders jump into this game with hopes, dreams, and dollar signs in their eyes. They saw their friend or colleague showing off his tendies and thought to themselves – if this schmuck can do it, so can I.
And what happens next? Well, they lose their shirt, and they start talking crap about trading.
Believe it or not, that was me and my first go at trading many moons ago.
If you don’t want that to happen to you, you better learn from my and other people’s mistakes. And if you have two brain cells in your head, you don’t have to lose money on your first try.
So, let me show you the most common mistakes beginner traders make that result in losing a lot of money.
1. Overleveraging
Okay, let’s start with the elephant in the room – overleveraging. It’s a popular yet extremely risky strategy for most traders, especially beginners, who often don’t even realize what it means or can lead to.
As you may or may not know, trading with leverage amplifies your potential gains and losses.
While this means you’ll make bank if the trade goes your way, it also means you could be in a world of trouble if it doesn’t.
Trading with excessive leverage can also be incredibly stressful and lead to clouded judgment. That’s because fear and anxiety intensify with large amounts of borrowed money.
You’re at a greater risk of losing the money you can’t repay, and that’s pushing you to make impulsive and irrational trading decisions.
2. Jumping in without a plan
“A goal without a plan is just a wish.”
Antoine de Saint-Exupéry
You probably know Mike Tyson’s saying, “Everyone has a plan until they get punched in the mouth.”
Does that mean planning is useless, and you shouldn’t have a plan? No, everyone should have a plan for almost everything they start in life, including trading and investing.
You think Iron Mike got to be where he was without a bulletproof plan? He poured his blood, sweat, and tears into boxing for many years. And so do traders.
Sure, you don’t get punched in the face per se, but you arguably get much more damage when you lose (a lot of) money trading.
On the flip side, when you have a trading plan, you hold yourself accountable. You avoid chasing hot tips or constantly changing strategies.
Most importantly, you’re less susceptible to the psychological pitfalls of trading, such as fear, greed, and FOMO, which can derail your success as a trader.
On my first attempt at trading, I simply chose stocks I heard my friend was buying. I held onto them for too long and sh*t hit the fan.
I had no plan at all, and that cost me.
3. FOMO
Speaking of FOMO, like its cousin YOLO, it will cause you to lose money faster than a snowball in July.
The fear of missing out leads traders to chase momentum in the market. They see prices surging and worry they’ll miss out on the action.
But by the time they enter the trade, the momentum is already fading, and they lose money.
I believe FOMO is like wearing rose-tinted glasses. Everything looks bright, even though there’s a storm right around the corner.
You’re too optimistic and risk more capital than you can afford to lose, or you neglect to set stop-loss orders.
4. Too much, too soon
Beginner traders are eager to earn money. That’s only natural, right? I mean, that’s the whole point of trading. You want to make those gains as fast as possible.
And that’s one of their first mistakes, because trading requires skill and experience. Two things they don’t have yet.
Beginners often don’t take the time to learn about the markets, technical analysis, and risk management techniques.
So, don’t be that guy/gal. Take the time to learn the fundamentals. Take a stock trading course, get a real-time trading simulator app, and test your knowledge.
Practice patience and discipline by waiting for high-probability trading opportunities that match your strategy.
I always say that this is a marathon, not a sprint.
5. Not staying cool-headed
You know, Formula 1 drivers have their fair share of personal problems, just like the next guy. Probably even more (mo money, mo problems).
But when they take a seat in that 200-mph vehicle, they have no leeway to think about the things that bother them outside the racetrack. They’re all in for the duration of that race weekend.
For us traders, emotions can run high very often if we don’t learn to control them. And that leads to impulsive decisions based on fear, greed, and anxiety.
Essentially, we create our very own FUD.
Ultimately, the goal is to sit in front of the monitors like you’d sit in an F1. You need to stay calm even when you’re going 200 and approaching the curve.
That means staying calm and rational during periods of market turbulence and while having an overload of personal issues.
You need to avoid overreacting and making hasty decisions. Decisions that don’t match what you set out to do that day, week, month, or year.
6. Overtrading
As a beginner trader, I wanted to trade, trade, trade. But that’s obviously stupid, right? I mean, I didn’t even know how to read a candlestick chart properly.
And overtrading is downright harmful for many reasons.
First, you’re exhausting yourself by constantly monitoring the markets and executing trades. And that’s bad because your personal and professional lives suffer.
Each trade also comes with transaction costs, including brokerage fees and spreads. When you’re overtrading, you’re increasing these costs, and that eats into your profit.
And, perhaps most importantly, overtrading often results in lower quality trades and reduced performance overall.
7. Not learning
When you first drop into a new Call of Duty map, you learn all about it. You find out where the best weapons spawn, where you can camp, and what the chokepoints are.
Well, the same should happen when you start trading.
Financial markets are incredibly complex and constantly evolving, and trading is a skill that requires knowledge, practice, and refinement.
Even experienced traders benefit from ongoing education and self-reflection to identify areas where they still kind of suck and need to refine.
The traders I know are some of the smartest people I know. Not because they were born with a high IQ (because they weren’t) but because they love learning and improving.
They love trading more than anything and want to know ALL about it.
When I lost that first batch of money trading, I didn’t come back to it for quite some time. I was determined to succeed at it, and that’s why I became a student of the game.
I took trading courses and started paper trading. I still had a lot of fun, even though I had no real money in the game.
But you know what? I learned all about trading without risk.
8. Not cutting losses
“In trading and investing, it’s not about how much you make, but how much you don’t lose.”
Bernard Baruch
Not cutting your losses is like driving with a flat tire. Sure, you might make some progress, but ultimately, you’re heading for trouble.
Too many traders become emotionally attached to losing positions. They hope things will turn around, and they don’t want to face the music (that they made mistakes).
Holding onto their losing trades also means they’re wasting capital that they could use more efficiently elsewhere.
But one of the most basic things you learn in trading courses or trading school is stop-loss orders.
It’s such a simple and wonderful risk management tool that can save you a lot of moolah.
I know that losses are painful, but they’re also one of the most fundamental parts of trading. If you can’t handle them gracefully, well, guess what? You’re not made for trading.
Bottom line
Successful trading requires discipline, planning, continuous learning, and effective risk management.
The sooner you learn all of that, the better trader you’ll be. Don’t make the same mistakes 99% of new traders make.
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