If you know what can go wrong in trading, it's easy to avoid them. Small mistakes happen all the time, like typing in the wrong stock symbol or setting the wrong buy level. But these are easy to forgive and, if you're lucky, can even make you money. What you should try to avoid, though, is making mistakes because you didn't think things through well. These are the "deadly" mistakes that can ruin not just one or two trades, but whole trading careers. To avoid these pitfalls, you have to keep a close eye on yourself and work hard.
Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid travelling during a sleet storm. But if you don't know how dangerous ice can be, you might drive on it as if it's not a problem and only realise your mistake after you've gone off the road.
In their quest for a big win, traders often don't limit their losses. Of course, the only way to make a lot of money trading is to keep playing, which is hard to do if you've already lost all of your money. The problem is that most people think that any loss is a failure, so they don't have a plan for "safe" losses. They might think that "planning" for a loss means "planning to lose," but in reality, it means "planning to stay in the game."
Losses are a normal part of what we do. The key to trading well is to keep your losses to a minimum. Too many traders give a trade way too much "room," which means they lose a lot of money. This can cause an account to drop by 20%, 30%, or even 40%. You have to set up a system that will make sure you only lose small amounts so you don't run out of money.
There is a big difference between losing a lot of money all the time and losing small amounts in a planned way. You already know that you should keep your losses small; the key is to keep them smaller than your average wins. Even if you only win 50 percent of the time, you'll still make money if you set yourself up right. For example, if you have a weekly strategy that gives you $300 for every win but only costs you $200 for every loss, a tie between a win and a loss will still give you a $100 profit for that week.
The real key is to set a weekly goal and make sure each trade has a loss limit. So, let's say you want to make $300 a week and want to make sure you don't lose more than $200 per trade. If you lost on your first two trades of the week, you've lost $400. But all you need to do for the rest of the week is win three more times. Once you've reached your goal, you should stop trading. If you don't, you could end up with more losses, which would put you behind schedule and drain your account funds, which would only put you further behind.
Know when to get out of a trade. This is the most important rule. Set a loss limit, and don't go over it. But you should also make short-term goals and stop when you reach them. Don't ever gamble. Remember that looking for small gains over a long period of time is a much more reliable and consistent strategy that will help you avoid losing too much too quickly.
