50 Common Mistakes Most Traders Make

A survey of more than 500 experienced futures brokers asked what, in their experience, caused most futures traders to lose money. These account executives represent the trading experience of more than 10,000 futures traders. In addition, most of these Account Executives (AEs) have also traded or are currently trading for themselves. Their answers are not summarized because different traders make (and lose) money for different reasons. Perhaps you may recognize some of your strengths and weaknesses. Yet many of the reasons given are very similar from broker to broker. The repetitions stand to demonstrate that alas, many futures traders lose money for many of the same reasons. Perhaps these statements from experienced brokers can make a contribution to you, and make this sometimes fickle, often intricate, always interesting market place of futures trading possible.

Here is what they said:

1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.

Usually, they liquidate the good trades and keep the bad ones.

2. Many traders don’t realize the news they hear and read has already been discounted by the market.

3. After several profitable trades, many speculators become wild and aggressive. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”

4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.

5. Some traders try to “beat the market” by day trading, nervous scalping, and getting greedy.

6. They fail to pre-define risk, add to a losing position, and fail to use stops.

7 .They frequently have a directional bias; for example, always wanting to be long.

8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a time frame.

9. They overtrade.

10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system.

11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.

12. Many traders break a cardinal rule: “Cut losses short. Let profits run.”

13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.

14. Often traders have bad timing, and not enough capital to survive the shake out.

15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.

16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.

17. Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.

18. Too many traders are under financed, and get washed out at the extremes.

19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits.

This is really a lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.

20. Trying to trade inactive markets is dangerous.

21. Taking too big a risk with too little profit potential is a sure road to losses.

22. Many traders lose by not taking losses in proportion to the size of their accounts.

23. Often, traders do not recognize the difference between trading markets and trending markets.

Lack of discipline is a major shortcoming.

24. Lack of discipline includes several lesser items; i.e., impatience, need for action, etc. Also, many traders are unable to take a loss and do it quickly.

25. Trading against the trend, especially without reasonable stops, and insufficient capital to trade with and/or improper money management are major causes of large tosses in the futures markets; however, a large capital base alone does not guarantee success.

26. Overtrading is dangerous, and often stems from lack of planning.

27. Trading very speculative commodities is a frequent mistake.

28. There is a striking inability to stay with winners. Most traders are too willing to take small profits and, therefore, miss out on big profits. Another problem is under capitalization; small accounts can’t diversify, and can’t use valid stops.
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1. PLAN YOUR TRADE AND TRADE YOUR PLAN. You must have a trading plan to succeed. A trading plan should consist of a position, why you enter, stop loss point, profit taking level, plus a sound money management strategy. A good plan will remove all the emotions from your trades.

2. THE TREND IS YOUR FRIEND. Do not buck the trend. When the market or stock
is bullish, go long. On the reverse, if the market is bearish, you short. Never go against the trend.

3. FOCUS ON CAPITAL PRESERVATION. The most important step that you must take when you deal with your trading capital. You main goal is to preserve the capital. Do not trade more than 10% of your portfolio in a single trade. For example, if your portfolio is $10,000, every trade should limit to $1000. If you don't do this, you'll be out of the market very soon.

4. KNOW WHEN TO CUT LOSS. If a trade goes against you, sell it and let go. Do not hold on to a bad trade hoping that the price will go up. Most likely, you end up losing more money. Before you enter a trade, decide your stop loss price, a price where you must sell when the trade turns sour. It depends on your risk profile as of how much you should set for the stop loss.

5. TAKE PROFIT WHEN THE TRADE IS GOOD. Before entering a trade, decide how much profit you are willing to take. When a trade turns out to be good, take the profit. You can take profit all at one go, or take profit in stages. When you've recovered your trading cost, you have nothing to lose. Sit tight and watch the profit run.

6. BE EMOTIONLESS. Two biggest emotions in trading: greed and fear. Do not let greed and fear influence your trade. Trading is a mechanical process and it's not for the emotional ones. As Dr. Alexander Elder said in his book Trading For A Living, if you sit in front of a successful trader and observe how he trades, you might not be able to tell whether he is making or losing money. That's how emotionally stable a successful trader is.

7. DO NOT TRADE BASED ON A TIP FROM A FRIEND OR BROKER. Trade only when you have done your own research and analysis. Be an informed trader.

8. KEEP A TRADING JOURNAL. When you buy a stock, write down the reasons why you buy, and your feelings at that time. You do the same when you sell. Analyze and write down the mistakes you've made, as well as things that you've done right. By referring to your trading journal, you learn from your past mistakes. Improve on your mistakes, keep learning and keep improving.

9. WHEN IN DOUBT, STAY OUT. When you have doubt and not sure where the market or stock is going, stay on the sideline. Sometimes, doing nothing is the best thing to do.

10. DO NOT OVERTRADE. Ideally you should have 3-5 positions at a time. No more than that. If you have too many positions, you tend to be out of control and make emotional decisions when there is a change in market. Do not trade for the sake of trading.