If you know the pitfalls of trading, you can easily avoid them. Small mistakes are inevitable, such as entering wrong stock symbol or incorrectly setting 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 rather than simple errors. These are the “deadly” mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.
Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.
Greed is an obvious but dangerous mistake. By their very nature, of course, traders are greedy, since they start trading in order to make more money. Wanting more money isn’t dangerous; wanting it too quickly is. Every trader wants to get rich, and they want to do it in one trade. And that’s when they lose.
Trading success comes from consistency, not from a trading “grand slam.” There are a lot of newbie traders out there who believe that their fortune will be made in just one amazing trade, and then they’ll never have to work again for their entire life. This is a dream, a dangerous one. Successful traders will realize that right away. The best, and usually only, way to make a fortune in trading is consis¬tency. And this fortune will probably be made in small amounts. Unfortunately, most traders go for the big wins, which result in big losses.
It makes sense that traders are more interested in larger profits per trade. What would you rather have – a fifty dollar bill or a five dollar bill? The answer is obvious. But when it comes to trading, it’s not that simple. If you don’t take the five dollar bill, you may lose fifty dollars of your own money, or more. The main thing to keep in mind is this: even though you can’t take the fifty dollar bill right away, you can take ten five dollar bills over a longer period of time. And the end result is the same – fifty dollars.
And that’s the main point here: small, steady profits add up. This is not to say you’ll never have a big winner. In options trading for example, it’s pretty common to have profits of 100%, 200%, or even 1,000% in just one trade. So, it’s not impossible to snag the big profits – it’s just not something you should count on. If you expect numbers like this all the time and accept nothing less, you’re setting yourself up for guaranteed disappointment.
The key to trading success: small but consistent profits. Consistency is the key, because if your profits are consistent and predictable, then you can simply use leverage to trade size. Therefore, you must know when to exit with a profit. Resist the temptation to stay in “just a little longer, for just a little more.”