The 5 most common trading mistakes and how to avoid them

Trading Strategy Playbook | Lesson 1

1. Trading is inspiration not perspiration…

Wrong, trading is 95% hard work. Hope that has not left you feeling deflated. You may well follow social media accounts keen for you to subscribe to their unique analysis of candlestick patterns, stochastics and star signs that will unlock millions. Why are they telling you and why do they need your £50 a month?

Trading requires evidence, substantiation, and research before committing to opening or closing a position. You would not embark on a legal career part time and trading is no different.

Before you even consider taking a position, do you understand what it is you are trading?  Basics such as the market structure, its hours of operation, the value of each price move (tick increment) is just the start. Are volatility levels high or low? What factors influence the price of this asset? Should I trade now or wait? Just some of the questions you should ask yourself daily before entering a position. Markets are always evolving, and the answers may change on a daily basis.

2. Fear and greed are not equal

Do you think traders like putting limits on how much they can make? Of course not.  Fear should dominate greed. Think of it like this: the fear of losing your house should outweigh the greed of making enough to buy a second one. So, limit losses. Always employ ‘stop loss orders’ that ensure you get out of a losing position at a known cost. Do not mistake all ‘stop’ orders as equal and understand the difference between a ‘stop market/guaranteed stop’ order and a ‘stop limit price.’  Markets can move from one price to another without trading which can negate the protection of a stop loss order.

Restricting losses should always take precedence over running profits but discipline is needed here too. Traders sometimes add to good positions as the market moves in their favour. They adjust stop loss orders to ensure a profit or break even when the market price is going in the right direction.  Avoid the mistake of sticking to your initial trade ‘no matter what.’ Markets change, so should your trade.

3. Risk is NOT the same as Reward

One question before every trade. Is it worth it? Understand the risk-reward ratio R: R.

Risking £500 to make £500 is a ratio of 1:1. Risking £100 to make £500 is 1:5. Which implies you only need to be right 20% of the time to profit.

Regardless of your risk appetite, and 1:5 would be considered on the high side, too often traders take profits too early, an opportunity lost, and let losing trades run too long, relying on prayer or luck to turn the markets and save them rather than crystalize a loss. Do not fall into this trap, especially true if day trading. You do not have time to wait for the market to turn around if you need to close that position before the closing bell.

On the reward side of the equation, use a firm limit order to automatically close your trade when the price arrives at your chosen profit taking level. Greed can be dangerous; markets do not move in one direction forever.

A risk: reward ratio is vital but avoid the mistake of applying the same metrics to all trades. The lower the risk/stronger your conviction the higher the ratio. Which brings us to number 4.

4. Bias mistakes

We all have them. Key is to recognise them.

The tendency to run losses too deep and take profit too early mentioned above is known as ‘loss aversion’ bias.  There are others, such as looking for any information that supports our view while ignoring data or news that contradicts it, a ‘confirmation’ bias. Traders need to objectively analyze all information.

‘Anchoring’ bias leads us to rely on the first piece of information received and anchor decisions even when the latest information invalidates this. Equally ‘herding’ bias (following the crowd), rather than an objective decision based on analysis is a lazy mistake to make. Working against biases requires effort, which is why discipline and hard work remain key.

5. I’m right, the ‘market’ is wrong…learn

You’ve done weeks of research: fundamentals, technical, sentiment, changes in central bank reserves, correlations – all your signals point to a good day for gold. So, you buy, and the price is crashing. You have the option to rage against the market, throw your screen at the wall and watch your losses fall deeper into the red, provided that was not the screen you relied on for market data. You still believe you are right, and the market is wrong. It is not and the market cannot hear you.

At the risk of stating the obvious, whoever took the opposite view to you and sold you this gold is happy right now. So why not learn from them? Consider a ‘flip’ turning your buy into a sell or vice versa.

A mistake is only a mistake if you do it twice.  Every trader makes them, do not ignore them they are an opportunity to learn. Equally when you get it right, use the experience to create successes in the future, many traders keep detailed diaries to learn the lessons of wins and losses.

Each time you have a new position you should continually ask yourself the following questions: Why did I enter this trade? Should I keep the position? Should I adjust my parameters? Are there any economic events or data that could impact my trade. Keep learning on every trade.

Author: David Michael, Principle Trainer, ZISHI

At ZISHI, we help you develop the skills and mindset needed to navigate today’s markets with confidence. Our tailored training solutions, real-time simulations, and expert-led programmes provide traders at all levels with the practical knowledge to succeed.  Explore a full portfolio of Financial Markets, Financial Products & Trading programmes here.

For those looking to nurture young talent, our Graduate & Early Careers programmes offer customised learning experiences that empower emerging professionals to develop the resilience and adaptability needed in today’s fast-paced financial industry. Investing in the growth of the next generation ensures your organisation is well-positioned to succeed in an ever-evolving financial landscape.

Trading Strategy Playbook: Lessons from Trading Trainers

Over the next few weeks, we will be sharing key lessons from industry veterans to help traders at all levels sharpen their strategies, improve discipline, and master market dynamics.

Coming Next:

• • Lesson 2 | Trading Choices: Selecting the Right Market Instruments.
    Once upon a time, traders had limited options—now, from futures to CFDs and spread betting, the possibilities are endless. But which is right for you?

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