15 biggest Trading Mistakes | Keeping Trading Losses To A Minimum

I cannot emphasize this enough, because this is actually the crucial point whether one becomes successful or not. You have to control your risk and keep your losses as small as possible. There are whole books on the subject, but my rules here are very simple and work.

The fact is that every trade has a risk of loss. With every stock I buy, I take the risk of suffering a loss. There is no way to avoid that. I do not know any trader, no matter how good, who has a 100% success rate. Only if you manage your losses properly, you have a permanent chance of survival in this business.

Remember, it is absolutely critical to keep your losses small.

A real example of how not to do it

A trader has 50.000 € on a trading account. He gets a tip and reads in a well-researched stock market letter that there is a stock that makes sapphire crystal. The name of this company is GT Advanced Technology.

There is a rumor that Apple will equip the displays of its iPhones with the company’s glass in the future. So far, Apple had already invested over 100 million dollars in the company.

The stock looks good, there are hailing buy recommendations, as you can see in the chart below.

The trader takes his 50.000 € and buys the stock for 10 dollars. He seems to have done everything right; the numbers are good, because the stock is rising and rising to almost 20 dollars. At this point the trader has made a profit of 50,000 €.

Only from the realized profit one can buy

But the profit exists only on paper, because as long as the trader does not sell, he has not realized the profit.

The trader remains invested and hopes for another 50.000 €. The stock then falls back to $13 and then rises again to over $20 and even reaches a new high. However, this breakout turns out to be a false breakout.

The trader has been invested for a good 6 months, but in the meantime the stock has fallen back to $11. The trader is again hoping for 20 when Apple announces that it will be using sapphire crystal and says to himself that he would probably sell this time.

But it should be different, Apple introduces its new iPhone and unfortunately it has no sapphire crystal… the stock plummets to below $1 within minutes, without the trader having the slightest chance to react. 55.000 € become 5.000 € within minutes. The trader is stunned and paralyzed, but he can’t do anything more… if he had only sold before… Meanwhile the share is at 0.02 Cent and the trader is broke…

The share price is real and I have traded it myself. It is/are GT Advanced Technologies and I have made money with the share. Let’s look at a chart of what happened to the imaginary trader:

Two errors that must be avoided at all costs

The trader has made two elementary mistakes which have led to the downfall.

These mistakes often happen to beginners, but even professionals get caught from time to time. … The mistake wasn’t that he didn’t sell at 20, because you couldn’t know at the time that this was going to happen to Apple and the stock could have gone up to 25, 30 or 50 dollars.

The main mistake was that he put all his eggs in one basket. He put his entire portfolio on one stock.

He could only risk a small fraction of the portfolio on one stock at a time

You can never be 100% sure about stocks, no matter which one. You must always be prepared for something negative to happen. That’s why you can only bet part of your portfolio on a bet.

My rule of thumb is that I never invest more than 10% of my portfolio in a single share. This means that the trader should only have invested 5.000 € in GT. So he would have lost only 5.000 € and would have 45.000 € to continue. From this follows:

Rule 1: Never invest more than 10% of your available capital in a trade!
The second big mistake was that the trader had no stop price and did not follow it. With every trade you have to know BEFORE you go, at which point you will drop out if it doesn’t go as you expect!

Losses are part of trading, even the best traders in the world make losses, but the key is to keep those losses low.

Set a stop price and follow the price development

I have for me the rule that I try never to allow more than 10% loss in a single trade. That means if I buy GT for 10 dollars, I automatically close the position if the stock price falls below 9 dollars. End of the day! And I have to set this stop beforehand, because once a trade is running and emotions like greed and fear are added, it’s hard to keep a cool head.

But now the trader was never behind and the trade started well right away. Here he would have had to adjust the stop price upwards at some point. This means that he secures a part of the profit in case the stock turns completely around.

You set a price at which you get out if the stock falls below it – that’s what you mean by stop.

There are various ways to set a stop and follow it. You can do this below the last lows, below a certain moving average or simply as a percentage of the high. No matter which method you use, it is important to have a method for trailing the stop price.

I myself didn’t go out at 20 on this trade either, because you couldn’t know that that’s where it would reverse. But I raised my stop price and got stopped at just over 15. I took the 50-day moving average in conjunction with falling below an important intermediate low.

That means I was still able to make almost 50% profit on the initial price. By the time the news came in and the price collapsed, the chart had already deteriorated so much that one should definitely not have been invested. From this follows:

Rule 2: Always set a stop price and follow it when the stock goes up!
With stops I have the rough rule of thumb that I never want to lose more than 10% with a trade.

I will summarize again because it is so important. You should always use only a part of the available capital for a trade and always set stop prices for each trade and adjust them upwards over time.

A practical example

For a better understanding a calculation example: A trader has a trading account of 50.000 €. He identifies a lucrative trade that he would like to trade. He takes 5.000 € (10% of the trading account) and buys the position. He directly places a stop 10% below the purchase price. Now there are two options:

  • The share falls below the stop. The position is sold at a 10% loss. The trader loses 500 Euro. He still has 49.500 Euro in his portfolio and can look for the next trade.
  • The share rises. If the stock is comfortably in profit (e.g. 10%), the trader pulls the stop on his position. If the position then turns around, he is stopped there and makes +/- zero. If the position continues to rise, he pulls the stop below the natural supports in the chart and lets the position run until it is stopped. If the position is stopped out at some point, for example with a profit of 20%, he has made a profit of €1,000 and his portfolio is now at €51,000 and he can look for the next trades.
  • I see the 10% marks described here for position size and stop as the maximum risk, which one should take in the long run, especially at the beginning. For me personally, that would already be too much. Especially at the beginning I would take smaller positions and keep the stops a bit tighter.

What is the optimal approach for small accounts?

However, there is a problem with smaller accounts. For example, if you only have €10,000 available for trading, it is difficult to follow this rule. Because it makes almost no sense to trade with 1000 Euro per trade.

Since many brokers demand minimum fees per trade, the fees are too high in relation to the invested capital and thus drastically reduce the trader’s chances of success.

If the minimum fee is e.g. 10 Euro, then the trader has already 1% costs when buying and again when selling. This is definitely unfavourable, because he starts every trade already with -2 %. In such a case, I would exceptionally advise to put in maybe 20% per trade, i.e. 2,000 Euros.

If you have a very small portfolio, you are practically forced to take higher risks at the beginning, that is unfortunately a fact.

So if you start trading with 10.000 €, you have to be sure that you can lose this 10 T€ in case of doubt without having to sleep under the bridge. This means that those who have no additional reserves and use their last money for trading are acting grossly negligent, I can only strongly advise against this.

Only when you have a certain amount “left” can you start trading “right” in good conscience, otherwise it makes no sense! From my point of view it should be at least 25.000 €.

A broker with favourable trading fees

It is also important to find a bank or broker that has low trading fees and is financially sound. The higher the fees, the worse the risk/reward ratio from the outset.

It makes a big difference whether I pay a fee of 8 Euros or 20 Euros for a buy or sell with 5,000 Euros. If you only make 50 trades a year (one per week), that’s already 1200 Euros difference, which makes 2.4 % on a 50,000 € deposit – with 100 trades a year it’s almost 5 %!

The broker should be financially sound at the same time. In the stock sector Sino with HSBC Trinkaus & Burkhardt as bank and Interactive Brokers are very well suited for trading. Here the total package is right.

Ideally, you have at least two providers to whom you divide your portfolios. In my opinion, Interactive Brokers is particularly well suited for trading in US stocks, also because the fees here are significantly lower than those of German brokers.

Concluding summary

If you take another step back, this is how successful stock market trading works:

  • You look at a certain number of selected stock charts each day. You look for promising setups in the charts.

These setups should offer a certain advantage, which increases the probability of a profit. Otherwise, you could flip a coin and it would be 50:50. If you randomly select stocks, you would have a 50:50 probability in the long run (in practice, taking into account fees, it is less than 50%).

With well-chosen setups (that would be a topic for a separate article) you can get 60:40, although I can only determine this emotionally and not scientifically. But it doesn’t matter, as long as it works.

So you consequently only trade the best setups. But 40% still go wrong, that’s part of the stock market, there is no system that works 100%.

And the crucial point now is to keep the losses as small as possible for the 40% that do not work.

If, for example, you are stopped out at 5% to 10% loss every time, then even many loss trades in a row are no problem.

If you manage to bring the 60% to the finish line and close one or the other trade here with a big profit, then you make profits in the long run, it can’t be any other way. You just have to have the discipline to do it the same way.

So the point about discipline is very important. There is no point in having a good trading system and good risk management if you don’t stick to it in the decisive phases.

It is absolutely crucial to follow your own rules meticulously, even when you are under pressure and your pulse is at 200… I cannot emphasize this enough, and it is the linchpin of success in stock market trading.

The 15 biggest trading sins

Below you will find a short list of those trading sins that hinder you to tap your full potential almost daily. Most of them will be familiar to you. In the course of my coaching of traders I kept myself busy.

In the following you will find a short list of those trading sins that hinder you to tap your full potential almost daily. Most of them will be familiar to you. In the course of my coaching of traders I also dealt with seemingly minor issues that had already disappeared from my field of vision, such as the question of technical equipment. My personal memories combined with the experiences from coaching various trading characters offer a hopefully meaningful list of both conscious and unconscious trading sins.

Even the most painful memories of some of my greatest trading sins did not prevent me from putting my foot in the same faux pas more than once. Even today, after fourteen years in the daily stock market business, I still discover one or two rotten eggs when writing and evaluating my diaries. At times I couldn’t keep my hands off the price target manually, a week later a boredom trade is on the books, which was clearly entered before leaving the sideways zone. Or a clear short signal of a stock is ignored by me, just because I wanted to be right with my bullish assessment of the overall market. As long as the performance is right, you will usually not pay enough attention to your weaknesses. But until they finally strike back, and they always do. I don’t know of any other activity besides poker where joy and sorrow are so close together every day, every hour or even every minute. And as with poker, in the end only those who go through the hard school of defeat and demoralization with their eyes wide open will prevail. Only those who expose their shortcomings, accept them and work on them with discipline and perseverance have a chance of lasting success on the stock market. As self-evident as this may sound; the number of those who actually learn from their mistakes and make capital is surprisingly small.

It helps me every now and then to look at this list and briefly think about the sins I still commit.

The list is in alphabetical order for the sake of simplicity. Although the often so called “Big 5”, such as entry, exit, risk and money management, and the trader psychology can certainly be considered the cornerstones. But only a solid overall concept will ultimately ensure success, you can’t just pick out individual building blocks. And the good news at the end: all of the following potential weak points can be targeted. Either through systematics and method, or through personal ambition and discipline.

Dependence

Mentors or stock exchange letters are a common way to gain a foothold in the initially often intimidating business market. There is nothing wrong with that. However, this can only be an intermediate stage or second leg for ambitious traders. The goal must always be to be able to make well-founded decisions yourself. Without being dependent on a guru who can let you down at any time, or whose system, so far so great, suddenly fails. Also allowed is the remark: reasonable service providers offer help for self-help. In other words, where the customer can actually learn something and does not have to blindly trust a black box.

Actionism/Overtrading

Also known as boredom trading. For daytraders who are constantly sitting in front of the glider is naturally a much bigger problem than for occasional or swing traders. It simply requires self-control and discipline to really only go into action when the setup is clearly fulfilled. Every now and then I still find myself looking for fresh buying signals in stocks in a very bullish market. Instead, I go into those whose initial spark was actually already one or even two trading days ago. Overtrading can reduce the performance extremely, who recognizes this weakness in itself, must absolutely work on it!

Excuses / Blame

The oil price is to blame, the broker has taken funny notes, the stock market letter is junk, or my children have distracted me. Blame for an unfortunate mishap or the sinking of the whole portfolio are always external influences. Whoever thinks like that has not yet reached the top of the pyramid. Error source no. 1 is clearly the trader! Only those who take responsibility for their actions, who know exactly what their weaknesses and strengths are and work on them, can be at the top in the end.

Equipment

No handicraft without tools! I often have to do some really tedious persuasion work until I can get a client with a turnover of tens of thousands of Euros per month to spend 49€ for a halfway usable chart software. Trading must be imagined as a one-man business. And a few ridiculously small investments are a prerequisite for that. Apart from the chart software, all you need is a suitable broker for your needs, and then you can start trading. See our broker comparison, which is even cheaper than opening an account directly.

Broker

It is already a small national phenomenon that the German is reluctant to change his bank or broker. Once the effort of opening an account has been made and the money has been transferred, most of them remain loyal customers for a very long time or forever. Without condemning this, I would simply like to refer you to our broker comparison. There you can simply compare your current broker with others. Both in terms of important features, but especially the costs per trade. As a member, you can even trade at lower prices with the most interesting brokers. Over time, these credits or costs add up to a considerable sum, which must be taken into account when building up your assets.

Income pressure

Alarmingly, I still meet newcomers who neglect their education or even quit their jobs in the hope of lasting success on the stock market. Is possible, no question. But with such a leap into the often cold water, one builds up enormous emotional and real pressure. It can only be counterproductive, that much is clear. If you only have reserves for 6 months, you won’t have the peace of mind when after 3 months the rouble still isn’t rolling. And thus only achieve even worse performance. As a rule of thumb: if you can’t devote at least a whole year to trading without pressure, day trading as a full-time job is not advisable. On the other hand, you should simply build up your knowledge, routine and hopefully your financial cushion with relaxed end-of-day trading.

Entry

This would go beyond the scope of today’s article, we will soon dedicate a separate article to the most common mistakes made when getting started.

Martingales

This is actually part of the upcoming article “Moneymanagement”. But I would like to point out the dangers of increasing the position in the loss. Most of the time such a “strategy” goes hand in hand with the renouncement of a stop loss. 99 times such an approach may turn out well, but the 100th time you kick yourself out of the business. Most Martingale strategies clearly violate the most important principle of a serious trader: capital preservation!

Disorganization

Plan your trade, trade your plan! Another prime directive in our business. The goal must be to know BEFORE you start, where to set the stop, what quantity is reasonable, and where and how to plan the exit. Quite apart from that, of course you also need a solid set of rules for the entry itself. One of the first questions in my coaching sessions with clients was: “How do you arrive at your entry and exit decisions? And this was rarely answered concretely. No wonder that problems arise from this. Only those who have a plan, and also implement it in a disciplined manner, have a long-term chance in the shark pool stock market.

Bossy

Catch even the best now and then. This includes ignoring a mentally set stop loss because you believe you can predict the market. Or topping up losses, repeated re-entries into the original trading direction after being stopped out, etc. The market is always right, this fact should not be ignored for a second.

Overconfidence

Especially when you are experiencing a great run, you tend to make the wrong decisions. You feel invincible and want to leave your mark on the market. But the market doesn’t put up with this and quickly throws you back down to earth. Even for the most experienced professionals this is a problem every now and then, we are human beings and not robots.

Volatility / Mental instability

Of course, drawdown phases are hard and ruthless, and objective monitoring and fine-tuning of the setup is always allowed and appreciated. But after every short-term phase of deterioration, doubting the whole setup, throwing it overboard and testing new ideas in practice…these are not good conditions. A trend follower becomes an anti-cyclical trader overnight. And next week he’ll be a Ross follower, already experienced everything. You should first isolate the weaknesses, accept them and work on them before turning to a completely new concept. The trading sin of actionism/trading described above also goes partly hand in hand with this psychological instability. Jumping from one trade to another because you constantly revise your decisions is something that only a broker is happy about. Under this term also fits the panic that many people feel when mistrades after mistrades come crashing down on you. Then one often ignores many signals out of fear of further losses, thereby missed profits only reinforce this vicious circle. The opposite of overtrading, so to speak. The best thing to do is to take a timeout, consolidate the setup, and do a short papertrading until the process is running smoothly again and has been successful. And then fall back into the water.

Overoptimization

Backtesting and optimisation using software is an excellent tool for eliminating weaknesses and shaping the personal setup. However, many beginners in this field usually deceive themselves in the form of curve fitting, called over-optimization. This means that for far too many degrees of freedom based on the past the exact optimal value is determined. Without giving them any reasonable room for maneuver, or paying attention to changing markets and thus stability. This was also the case for me in the long ago beginnings of a system search. 3-4 indicators with different parameters for long and short trades, different stops and price targets depending on the positioning, simply everything exactly matched to the past known up to that point. In total there were more than 10 degrees of freedom which could be optimized. A nightmare for the stability of the setup. Keep it simple, stupid! The less external tools and parameters, the greater the probability of survival and success.

Impatience / Greed

Seminars, mentors, coaching and even well-managed stock market letters can certainly shorten the apprenticeship period of a prospective trader. But nothing comes from nothing, as in any training you have to invest a lot of time and patience. Get constantly mails alá “…try now for three months completely after Ross my luck, and make only losses. Trading is not for me.” Or even better are heroes like “Will quit my job next month, which book and which indicator will make me a winner?”. The mental attitude alone separates the wheat from the chaff here. Remember how long your training took. 3 years, 5 years, or even longer? And don’t you learn more every day? It is no different with trading, even more extreme. Who believes that the stock exchange will give you financial freedom as a casual sideline, a rude awakening is waiting for you.

Purposeful optimism

Many traders consciously or unconsciously ignore a chart image that clearly recommends smoothing out ongoing trades. Whether in the minus or not, if it does not suit you, you simply do not face the facts. A category above this are traders who still blindly trust a setup even though it constantly produces losses. This eyewash alá “it’ll work out, it worked out in the demo” can and will lead to a very painful end.

All these points can be worked on in a targeted manner, the prerequisite for this is, apart from the absolute will, a properly kept journal. If this is missing completely or is only used irregularly, one commits another trading sin. Only a detailed journal, which records the bare figures as well as the feelings and thoughts during entry and exit, helps one to improve self-knowledge, self-control and discipline with regard to trading.

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