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Five common trading mistakes and how to avoid them

Five common trading mistakes and how to avoid them

Simple and subtle guidelines are important for any traders.

Here are five essential rules, which traders should respect:

1. Follow the trend

Most retail traders have troubles following trends. When a trend is developing, retail traders are fighting it, attempting to pick tops and bottoms.

For example, for the whole month of February 2017, AUDNZD has been steadily rising. For four weeks in a row, AUDNZD has made higher highs and higher lows. And yet according to Sentiment Trader only 19% of retail traders are long, hence 81% of retail traders are fighting this trend.

Many traders also have troubles identifying a trend. So here are three suggestions that can help:

  • Stick to one time frame (usually the daily) for trend identification. The smaller time frames can be used to “zoom-in” for better entry and stop placement, but the trend needs to be identified from one primary time-frame consistently.
  • Use Pepperstone’s Sentiment Trader and wait until the “crowd” is structurally on the wrong side of a move. When Sentiment Trader starts showing readings below 40% (in an uptrend) or above 60% (in a downtrend), most likely a stable trend has emerged and traders must only look for entries in line with the trend.
  • Follow the net non-commercial direction from the Commitment of Traders report. Non-commercial entities are nothing other than large speculative accounts that follow longer term trends.

2. Sit on your hands until there is a trend to follow

If there is no clear trend in place, do nothing, refrain from trading.

3. Cut losses as soon as logically possible

Some traders hold onto a losing trade, thinking that the market had to turn around sooner or later. That is a big mistake.

The process of monitoring your trade after the initial entry is called “trade management”. Trade management is an area that is not covered in detail within classic trading books. It is all about entries and exits. If you do not know when to cut losses, let the market dictate when it is OK to hold, and when it is time to fold.

4. Let winners run as long as logically possible.

Do not hold onto a losing trade, but hold on a successful one. Simple tools that can help with managing trades successfully are:

  • Peak/trough analysis
  • Price behaviour
  • Common sense

5. Know Your Indicator (KYI)

Some traders prefer to overlay technical indicators on their chart, to assist with decision-making. However, too many traders fall into the trap of “covering” their charts with technical indicators, without knowing what the indicators actually indicate and how the indicators are built.

Technical indicators are tools. Without a good understanding of what exactly your “tool” does, you will not know when or how to use it.

If you choose to use indicators, make sure you know them inside out. If you know everything about them, you will gain much more insight than by simply overlaying them on the chart and “trusting them blindly”.

So these are five rules you should follow for successful trading. All of them make for disciplined and consistent trading, as opposed to emotional trading or simply “gambling”, which does much harm to trading accounts.

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