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If you know the pitfalls of trad?ing, you can easily avoid them. Smallmistakes are inevitable, such as entering the wrong stock symbol or incorrectlysetting a buy level. But these are forgivable, and, with luck, even profitable.What you have to avoid, however, are the mistakes due to bad judgment ratherthan simple errors. These are the ?deadly? mistakes which ruin entire tradingcareers instead of just one or two trades. To avoid these pitfalls, you have towatch yourself closely and stay diligent.
Think of trading mistakes like driving a car on icy roads: if you knowthat driving on ice is dangerous, you can avoid traveling in a sleet storm. Butif you don't know about the dangers of ice, you might drive as if there were nothreat, only realizing your mistake once you're already off the road.
Traders often fail to limit their losses in search of a big win. Ofcourse, the only way you can make a fortune with trading is to actually stay inthe game, and it's hard to stay in the game when you've already lost all ofyour money. The problem is that people often feel like any loss is a failure,and so they don't incorporate a strategy for ?safe? losses. They may feel like?planning? for a loss is planning to fail when, in fact, it's planning to keepthemselves in the game.
Losses are a part of our business. The key to trading success is tolimit your losses. Too many traders give a trade way too much ?room,? and theytake big hits, which can shrink an account down by 20%, 30%, and sometimes even40%. You have to put a system into place which will ensure that you set smalllosses to avoid emptying your account.
There's a huge difference between losing big on a regular basis andlosing small in a controlled trading plan. You already know that you shouldkeep your losses small; the key is to keep them smaller that your average wins.Even if your winning percentage is only 50%, you'll still be profiting if youset yourself up correctly. For example, if you have a weekly strategy that getsyou $300 for every win but only takes $200 for every loss, a tie of a win and aloss will still get you a $100 profit for that week.
The real key is to set a weekly goal and to be sure that you set a losslimit for each trade. So let's say your goal is $300 each week, and you want tobe sure that you lose no more than $200 per trade. If your first two trades ofthe week were losses, then you're down $400. But all you need is three morewins through the rest of the week to make your profit. Once you meet your goal,stop trading, otherwise, you may end up with further losses, putting you behindschedule and gouging into your account funds, which will simply set you backfurther.
The basic rule: always know when to exit a trade. Seta loss limit and stick to it. But also set short-term goals, and stop whenyou've reached those goals. Don't ever gamble. Remember that looking for smallgains over the long term is a much more reliable and consistent strategy whichwill help you avoid losing too much too quickly.
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