We all want to trade successfully, but we often make mistakes, sometimes subconsciously or we underestimate the importance of a systematic error. Let’s look at how to improve our trading.

1. Bad risk and money management

In addition to psychology and strategy, risk and money management are the main pillars of successful trading, but many traders don’t pay enough attention to it. It sounds mathematical and possibly daunting for beginners, but the knowledge about risk and money management protects your account and thus forms the basis for your trading. Trading beginners often don’t pay attention to the simplest basics, e.g. brokers often report that new traders risk much more than 2% of their capital per trade. The word “gambling” comes to mind.

So how do you set a reasonable stop loss? There is a simple solution for this. You only need your account and a pocket calculator. We will explain the application using an example:

Example for good money and risk management

Your account size is 10,000 euro and you enter a trade. You only want to risk 2% of your capital. So you calculate 10,000 0,02 and get a value of 200 euro. This is the amount you can risk. Also, from a mathematical point of view it makes sense to use a stop loss as a percentage of the capital. Your risk parameters also adjust in loss phases. So you can only risk € 180 at € 9,000. This approach helps you keep your capital longer and you can therefore continue to operate on the financial market for a longer period and recover systematically. For as always, there is no trading without capital.

An extended approach to this is the stop-loss setting based on the high water-mark principle. To do this, you always take the maximum of your account and can then calculate your risk for your stop loss. Here is another example:

Example for money and risk management according to the high water-mark principle

The highest level of your capital last month was 10,700 euros. Now you calculate 10.700 0.02 and can therefore risk 214 euros in your trade. If your account balance falls below these 10,700 euros, you keep your calculated risk. If your capital increases, you re-calculate your risk for your stop loss.

2. Missing or incomplete strategy

Another mistake is the application of an incomplete strategy, or even worse, applying a strategy without understanding the meaning behind it. It is important to understand a strategy in all details to be able to react to changes and, if necessary, to make adjustments. Of course you do not have to understand how each individual indicator is calculated, but the general idea must be understood. In addition, each strategy requires clear entry and exit rules in order to make rational and objective decisions.

A strategy always consists of a defined entry and a defined exit. Your task as investor and trader is to find the right situations in the market for your strategy and then act according to your rules. You can create these rules as you wish, and then test them to see if your financial market observations work. To improve your idea you can use so-called filters, i.e. you add more conditions that filter out bad trades, thereby reducing the number of your trades while improving results. If you are using support and resistance, for example, you can use the RSI as a filter. If the price hits a support AND the RSI moves to its lower extremes, it is more likely that the price will bounce backwards. To get started, you must also define the exit. In our example, you can place your stop loss under the support line and then define your goal. Your target can then be the next resource in the chart or a fixed profit target.

It is important to always test your ideas first, and only when you are sure to be successful in the real trade.

3. Trading style does not fit the lifestyle

Most new traders are not very aware of the problem of the time frame or the preferred style of trading. Many beginners like to act on the small timeframes since they have only time in the evening, after work. It is quickly forgotten that liquidity in the evening hours is lower.

You must also monitor and manage your current positions from time to time. This is often not possible beside work. As a result, a professional trader or investor has different requirements for his strategy and his direction in trading. For example, it is difficult to trade the DAX while you are sitting in a meeting at work. Therefore, we recommend a strategy on the higher periods of the day in such cases, such as the daily chart. If you are working with leverage, you may not feel comfortable keeping your positions overnight. Then you should have the option to close your positions before the trading session ends or adjust your position sizes so you can sleep better. As you can see, trading is very individual. A flight attendant cannot act like an office worker. Likewise, a part-time trader cannot act like a full-time trader.

4. Missing documentation for evaluation

The vast majority of all newcomers and even many experienced traders do not run a trading journal and only look at the history function of the broker’s trading platform from time to time. But this is by no means sufficient if one considers that a good documentation of the trades can reveal expensive mistakes. Turning off these mistakes improves performance.

By documenting your trades, you get many ways to improve your trading. You can find out whether your strategy works well only in certain phases. You’ll also see if you should work on your stop loss, or on your profit targets.

A trading journal also gives you hints on your hit rates. You can adjust many levers and improve your strategy. A personal hint: Often it can improve the performance very much if you work on your losers instead of your winners.

5. Chasing losses

The chasing of losses to complete the day, week or month breakeven or in profit is also a widespread mistake. The cause of this behavior is psychological. Each trade should be considered individually and not associated with others. Furthermore, patience and discipline are the key to trading. Bending and breaking new trades makes no sense. This phenomenon is also called Revenge Trading. Surely this will work out now and then, but in the long run it will end in disaster. It is often observed that, in connection with revenge trading, the rules of risk and money management are also thrown overboard and the position is multiplied many times.

Here iron discipline and mental strength have to be shown. Especially when dealing with large accounts, these things are essential. It can break your nexk and take away your existence as a trader.

Do you recognize yourself in these mistakes?

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This article was first published on Tradimo