Trading can help you make a lot of money. It can help you create a side income stream. However, if you do not avoid the common mistakes, it can get you into trouble. If you’re not careful with trading, you can lose your entire capital as well. It is essential to understand the mistakes which you need to avoid before placing your first order. We will today share with you three ways in which trading can get you into trouble. Once you can avoid these three mistakes, it becomes easy to start trading profitably.
1. Not following a strategy
Any trade requires a proper plan. If you are trading with your gut feeling or relying on tips, it is not easy for you to make money. A strategy involves different aspects like:
• Capital allocation
• Risk reward ratio
• Stop loss and targets
• Technical indicators
Once you take these into account, it is easy for you to execute trades based on strategy. Sure enough, you might execute fewer trades, but these will be much more accurate. That is why the chances of making a profit are on the higher side. On the other hand, if you do not stick to a strategy, you are most likely to lose money in the long term.
After creating a proper strategy, you have to test it extensively. Only once you do so, you can eliminate the loopholes or the weak points. After that, it is easy to follow that strategy to make a decent profit.
2. Not closing positions in time
One of the most critical aspects of trading is to close the trade in time. In greed or fear, you can keep them open for a long time. If you do not close your positions in time and let them run, you will most probably face a loss. That is why; you have to decide in advance when you want to close your positions.
The first thing which you need to do is to place a proper stop loss. When you put a stop loss, the trade will automatically close when the price level hits that number. It will ensure that you don’t need to monitor the trade manually. Sure enough, it will result in a loss, but it will be limited.
Similarly, you have to set a proper target price as well. When you set the target price along with the trigger price, it will automatically close the trade and help you capture the profits. The best way to open and close the trades at the right time is to opt for swing trading strategies which come with a proper target and stop loss. Once you do so, you can be sure that the trade will automatically execute
3. Excessive leverage
When you go for a swing trade or an Intraday trade, it is common to get leverage of 1:10 or 1:20. You have to ensure however that until you are fully confident about your strategy, 1:5 is good leverage, to begin with. It will ensure that even if you lose money, you can recover it. With the help of right money management and 1:5 leverage, it is easy for you to limit the drawdowns.
The leverage level also depends on various factors like:
• Likely duration of the trade
• Stop loss and target levels
• Any upcoming News
When you take into account these factors while deciding the leverage, it is easy to protect your capital and still make a good profit.
So, when you’re starting to trade, it is essential to avoid these three mistakes. With the help of proper due diligence and a checklist, you can trade profitably. It is necessary to keep these common mistakes in mind to ensure that the strategy which you build for trading is entirely foolproof.