Discover
the 7 poor trading habits that can lead to huge capital losses and learn how to
avoid common mistakes like chasing the market, trading out of boredom, and
using borrowed money to improve your trading success.
Table of Contents:
- Introduction
- Don’t Chase the Market
- Ignore Opinions of Others
- Adjust your Position Size
- Don’t Average into Losses
- Cut your Loss when your Trading goes Against You
- Never Trade Out of Boredom
- Never Trade on Borrowed Money
Introduction
Every trader aspires
to be successful, but poor habits can quickly lead to avoidable losses. Trading
is more than just buying and selling assets, it's about making disciplined
decisions and managing risks. Many beginners and even experienced traders fall
into common traps that cost them dearly.
Do you feel that you
are always losing money in trading whatever you are doing? You are doing
everything right in using candlestick charts patterns, different types of
indicators in the stock market. But nothing goes in your favor.
Well, your trading
strategies and techniques you are deploying are not the reasons here. Rather,
your poor trading habits which are causing these losses.
In this guide,
we'll walk you through seven poor trading habits that could be making your
losses bigger than they should be. If you're guilty of any of these, it's time
to reassess your strategy and make changes.
Don’t Chase the Market
One of the most common mistakes traders make is chasing the market. This happens when you jump into trades out of fear of missing out (FOMO) instead of sticking to a well-planned strategy.
Why this happens? Suppose, you see a chart like this.
Looking at the bullish
candles, you buy the stock, because, you don't want to miss the rally. But the
next thing happens like this. Full U turn.
Why does the market
reverse? Because, the market has already given a good move. So, being exhausted
at peak it takes some rest to make the next move to upside or downside. How
will you avoid this type of reversals of your trades? You need to locate an
area of value on the chart. An area of value is the area on the price chart
where buying pressure arises to push the price higher in an uptrend or vice
versa in a downtrend (resistance).
Initiating trade near
the support area gives you the opportunity to use favorable risk to reward
trade.
The market can be unpredictable, and impulsively entering trades based on price spikes or trends without proper analysis often leads to poor outcomes.
How to avoid it:
Develop a solid
trading plan and stick to it. Use technical analysis to set entry and exit
points ahead of time. Always look for an area of value on the chart before
taking a trade. Remember, the market will always present new opportunities.
Patience is key.
Ignore Opinions of Others
Listening to market opinions from
friends, social media influencers, or forums can easily cloud your judgment.
While advice from credible sources can be helpful, blindly following opinions
without conducting your own research is dangerous.
Others may have different risk
tolerances, goals, or time horizons than you. Trading based on others’ opinions
without understanding the underlying logic increases your exposure to
unnecessary risks.
Suppose, you see a chart of TCS
posted by someone claiming that the stock can give a move of 20% next week.
There were huge likes and comments and you also take the trade buying TCS. But
if you see that next day the stock falls 25% or more what will you do? Will
sell the stock? Will hold it? You don't know because, the person who posted the
chart doesn't give you proper guidance.
How
to Avoid It:
Trust your own analysis and
strategy. Don't trade based on others' opinions. You should always be the final
decision-maker. Educate yourself on market trends, strategies, and technical
analysis so you feel confident in your choices. Believe in your research.
Adjust
your Position Size
Poor position sizing
is another culprit behind major losses. Traders often risk too much capital on
a single trade or fail to adjust their position size based on the volatility
and risk involved.
Trading too large a
position increases your risk of losing a significant portion of your capital if
the trade goes against you. Not adjusting your size based on risk can wipe out
months of profits in a single trade.
How to Avoid It:
You should always
maintain same size of position size in each trade. You should adjust it on your
trades on different timeframes. If you keep a tight stop-loss, your position
size should be increased accordingly. If the stop-loss is widened, then your
position size should be decreased.
Don’t
Average into Losses
Averaging into losses
is a dangerous practice where traders buy more of a losing position in the hope
that the price will reverse. Suppose, you buy 50 shares of a company @Rs.100
each, and then the stock falls Rs.20 making a loss of Rs.50×20=1000.Now you
buy another 50 shares of it at Rs.80 to average the cost. If the share price
falls by another 20 Rupees, what will be your losses? Your loss amount will
widen to Rs,2000. And you can see that this “martingale” strategy can lead to
large losses if the price keeps dropping.
Doubling down on a
losing position increases your exposure to further losses and locks in more
capital in a losing trade. Often, traders find themselves holding large losing
positions that are hard to recover from.
How to Avoid It:
Instead of averaging
down, consider cutting your losses early and move on. If the market proves you
wrong, cut your losses immediately. Accept that not all trades will be winners
and look for better opportunities elsewhere.
Cut your Losses When the Market Goes Against
You
This point is very
vital one in continuation of the previous point. When you have hesitation to
cut the losing trade which has already proven you wrong, holding it in
expectation to come in your favor is a great mistake. You bought a stock at Rs.100 and set a stop-loss at Rs.80.If your trade got hit the stop-loss
coming down to Rs.80,you should immediately cut the stop-loss . If you hold
stock expecting to increase in future, your loss may be widened.
The longer you hold a
losing trade, the bigger the loss can become. Emotional attachment to a trade
can cause you to ignore clear signs that the market has turned against you.
Many traders fall into
the trap of holding onto losing trades, hoping the market will turn in their
favor. Refusing to cut losses is one of the quickest ways to deplete your
trading account.
How to Avoid It:
Set stop loss on
every trade and stick to them. Predetermine your maximum acceptable loss and
exit the trade when it’s reached. This will prevent emotional decisions and
could save your account.
Never Trade Out of Boredom
It’s common for
traders to feel the urge to trade when there’s nothing happening in the market
or when they feel they “need” to make money. This so-called “itchy finger
syndrome” leads to force traders to take trades with no real strategy. This
type action is called inconsistency. Inconsistent actions create inconsistent
results.
Trading out of boredom
typically results in low-quality, random trades with no basis in technical or
fundamental analysis. Overtrading can lead to unnecessary transaction costs and
emotional burnout.
How to Avoid It:
To avoid this problem you need to develop a well-defined trading strategy. A solid trading plan brings consistent results.
And the second thing
is to follow the trading strategy or trading plan. You should not deviate from
the set of rules you follow through your trading plan. Otherwise, you will have
to pay the fines for not following your plan.
Never Trade on Borrowed Money
Trading on borrowed money, or
leverage which can amplify both your profits and losses. Many traders are drawn to
the temptation of creating bigger positions using borrowed funds, but this can
quickly lead to massive losses if things go wrong.
If you trade with borrowed money you
won't want to lose. This will create an extra mental pressure which will damage
your trading rules. You will widen your stop-loss, you will average into
losers, you will be in a fear to book small profits.
How
to Avoid It:
Avoid using leverage unless you are highly experienced and can afford to lose the borrowed funds. Trade with money you can afford to lose and build your account gradually with low-risk trades. If you want to not happen to you always remember that never trade with borrowed money.
Conclusion
So, finally we can say
that poor trading habits can drain your account faster than you might think. By
recognizing and avoiding these seven common mistakes, you can improve your
trading performance and protect your capital. Successful trading requires
patience, discipline, and consistent execution of a well-thought-out strategy.
Stay mindful of your trading habits, reassess them regularly and always aim to
learn and grow as a trader.
Implement these lessons,
and you’ll be better equipped to navigate the unpredictable nature of the
market. Remember, the best traders are not those who never lose but those who
manage their losses smartly.
FAQs:
1. Why is Chasing the Market Dangerous?
Chasing the market is
dangerous because it forces you to react to market movements without proper
analysis. This impulsive behavior often results in buying at high prices and
selling at low prices when the market corrects.
2. How Can I Determine the Right Position Size for My Trades?
Position size should
be determined by your total capital, the risk per trade you're willing to take
(usually 1-2%), and the volatility of the asset you’re trading. Tools like risk
calculators can help ensure your position size is appropriate for the trade.
3. What Should I do when My Trade is Going Against Me?
If a trade is going
against you, the best approach is to stick to your predetermined stop-loss.
Cutting your losses early prevents emotional decision-making and helps preserve
your capital for future trades.
4. Is it Ever Okay to Average into Losses?
Generally, it’s not
recommended to average into losses. It increases your exposure to a losing
trade and could magnify your losses. It's better to exit a losing trade and
look for better opportunities.
5. What is Itchy Finger Syndrome in Trading?
Itchy finger syndrome
refers to the urge to trade out of boredom or restlessness when there’s no
clear setup. This often leads to low-quality trades that aren't based on solid
analysis.
6. Can Trading on Borrowed Money Ever be a Good Idea?
Trading on borrowed
money, or using leverage, can amplify profits, but it also significantly
increases risk. If the trade goes wrong, you could end up losing more than you
initially invested. It’s generally not recommended unless you have significant
experience and can afford to lose the borrowed funds.
7. How can I Avoid Making Emotional Trading Decisions?
To avoid emotional
decisions, always follow a clear trading plan with predefined entry, exit, and
stop-loss levels. Stick to your strategy and avoid reacting impulsively to
market fluctuations or external opinions.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
Related Articles:
9 Best Practices for New Traders: Your First Year Success Guide
A Logical Guide to Risk Management In StockMarket
