When you are trading, you need to have a trading strategy. You already know this, this is nothing new.
The 3 Key Elements To Every Trading Strategy
There are three key elements to every single trading strategy.
What to trade
First of all, a trading strategy tells you what to trade, right?
I mean, what stock or what options should you trade? What expiration? What strike price? So this is very important.
And as you know, I’m using my software PowerX Optimizer to find the best stocks and options to trade.
When to enter
Number two, a trading strategy, whatever trading strategy it is, has to tell you exactly when to enter.
When exactly should you buy or sell an instrument? Whether it is a stock or an option, it doesn’t really matter.
When to exit
Now, element number three is when to exit. Super important here and when we talk about exiting, there’s two ways to exit, right?
So we can either exit with a profit and if this happens, then yay, this is good, right? Or losses are part of our business as a trader.
So sometimes we have to exit with a loss. And of course, nobody likes it, but it’s part of trading.
So the key here is that you have to keep your losses small, right?
Anyhow, this is just a brief recap. These are the three major elements that every good trading strategy needs.
So let’s talk about the five biggest trading mistakes, especially considering that these are the things.
Trading Mistake #5
Trading mistake number five is trading the wrong stock or option.
What do I mean by this?
Trading the wrong stock or option means that you picked a stock and it is just diddling around while everything is taking off, right?
It happens. And this is where often I see that many traders are picking stocks based on news, right?
They hear, for example, “Tesla is making new all time highs.” “Amazon is making new all time highs.” Netflix , or Nio , the Tesla of China, right?
And then they’re jumping in and realize, “Oh, this is not going anywhere,” or it is going down.
So trading mistake number five, trading the wrong stock or option.
Trading Mistake #4
The next trading mistake is entering too early.
Has this ever happened to you that you were kind of right about the stock, but you entered way too early?
Let me give you a very specific example. Because right now, as we are still in this pandemic, the airlines have been one of the industries hit the hardest.
So you might say at this point, “Yeah, you know what? This is a good point to enter because airlines will go up again. People will travel again.” Right?
And so you might enter there or you might actually say, “Oh, this didn’t work. Let’s enter here as there at $10.”
Then they do in fact move up and you think, “Yay, I timed right.” But then it’s again coming down.
Has this ever happened to you that you entered a trade way too early before you should have happened it?
Now, especially if you are a PowerX Optimizer user, you know that with PowerX Optimizer and the PowerX Strategy you need to wait until it goes above a certain level.
Has it ever happened to you that you jumped into a trade before it actually went to the level? Probably, yes.
Trading Mistake #3
Let’s talk about trading mistake number three, and this is entering too late.
Let’s use Netflix for example.
When do most people enter Netflix? Traders like you and I, we are way smarter, right?
But many are entering it when it says, oh, it’s going through a key level, like $500.
And they say, “Oh, my gosh. Netflix is going above $500. I need to buy it right now.”
And what happens after it went through a key level? It comes down again.
Also, often when stocks make a new all time high, this is when many traders are getting interested in this.
Might not happen to you, but, hey, based on what I see of why people are losing money, is because they’re entering too late after a move has already taken place.
Trading Mistake #2
Let’s talk about trading mistake number two.
And again, all of this is connected to your trading strategy, because when you have a trading strategy, you have just these three major elements here.
So another trading mistake is taking profits too early.
Has this ever happened to you that you got out of a trade too early?
That you saw some profits and you were so excited, “Oh, my gosh, it was moving up.”
And you took the money off the table and realized, “Oh, my gosh, I did it way too early!” and the stock just keeps going higher and higher and you would have made so much more money if you had stayed in.
Let me just ask you, do any of these four trading mistakes resonate with you thus far?
Just let me know in the comments if you made any of these four trading mistakes and then I’m going to tell you the number one mistake.
The Trading Account Killer
This here, this mistake is the trading account killer. What is it? What is the number one trading mistake that kills accounts?
It’s not getting out of losing trades.
Here’s the deal. This is why it is so important. You’ve got to know that this is what will kill your account.
Can the other mistakes kill your account?
Let’s talk about the other trading mistakes.
Trading the wrong stock
What happens when you’re trading the wrong stock? This could be a technical error. For example, I wanted to enter AAL and I accidentally typed in ALL.
So it could be technical, or you just made a wrong choice, you traded the wrong stock.
But that is not killing your account. When you realize you made a technical mistake, you get out of this as quickly as possible.
Entering too early
Now entering too early. Does this kill your account? No. All that happens is that you’re missing out on some of the profits because you’re getting into a stock that is not yet moving.
I like to trade according to the PowerX Strategy. I want to wait until I see that the stock made a move and then I’m jumping in while the move gets momentum.
So this is why the PowerX strategy is called momentum trading. But anyhow, does this entering too early kill an account? No, it does not.
Entering too late
Now entering too late. This is a problem because this is where if you are entering close to the top, you might enter right before a stock turns around.
Now, here’s the good news. As you know, when we’re talking about a trading strategy here, when to exit, I like to work with profit targets.
So I know exactly when I’m taking profits before I even enter a trade. And in order to keep my losses small I work with stop losses.
And a stop loss, I set at 2% of my account. So I never risk more than 2% of my account on any given trade.
This means that if I have a $10,000 account, I would risk $200. If I had a $20,000 account, I would risk $400, making sense? OK.
So as you can see, if you are entering too late and you see, “Oh my gosh, the stock turns around,” you just get out of here.
Taking profits too early
Now taking profits too early, can this shred your account into pieces?
No, because keep this in mind, nobody ever got broke taking profits.
Why is not getting out of losing trades the #1 trading mistake?
Think about it. Has this ever happened to you? It happened to me in the beginning of my trading career.
In the beginning of my trading career I was trading bonds and I was on bonds. I was convinced that they were just going up forever.
And they didn’t, they came back and I just had an opinion. I just thought, you know what? No, these bonds will keep going up.
Have you ever had a stock like this where you entered, and after you entered, it approaches your stop loss, but as it approaches your stop loss, you take the stop loss out of the market and then it keeps going down.
And the $200 loss turns into a $300, $400 loss, and then into a $1,000 loss, then a $2,000 loss.
So what should have been a stop loss turns into a larger loss. This is what I’ve seen over and over that is killing accounts.
Accounts are not getting killed because you’re trading the wrong stock or because you’re entering too early or too late. Accounts are not getting shredded into pieces because you are taking profits too early.
But if you hold onto a losing trade for too long, this is the number one account killer. That is for sure, so keep this in mind.
Trading mistakes will happen
There are trading mistakes that will happen. These are the big five. Of course, there’s more trading mistakes.
You could, for example, go long when you intended to go short, or accidentally buy 1,000 shares when you only wanted to buy 100 shares.
It’s also possible to accidentally buy 10 options when you only wanted to buy one .
Keep this in mind, this will help you, when you make a mistake, liquidate.
What does this mean? As soon as you realize that you made a mistake don’t hope that the market turns around, don’t hope that it gets better.
Get out of this. Even if you get out of this with a small loss, right? This is how your account stays alive.
And yes, losses are part of our business. As a trader, you will experience losses. The key is really here to keep your losses small.
Recently traders have experienced more losses than usual because the markets have just been whipsawing, they’ve been going around.
And one of the biggest mistakes that you could make is saying, “I don’t want to exit the trade because I don’t want to have another losing trade.”
Trust me on this one , if you don’t take a loss when it is small, you will have to take a loss when it is bigger.
Yes, of course, every now and then you might get lucky and the stock turns around.
But let me ask you, when you held onto a losing trade for too long, did it turn into a winning trade?
Sometimes it does, more often than this, it does not.
So these are the five mistakes. And the number one thing that I want you to take from this is:
Get out of a losing trade when you see that your stop loss is hit. Have a stop loss, keep your losses small, and cut your losses short.
This way you stay alive and then can benefit from the large move that will happen in the market.
I hope that you enjoyed this article. If you did, do me a favor and leave a comment below or share it with anyone who might need to hear this, who might have experienced a larger loss.
- Trading too much, too eager to trade and taking positions when there is not enough confirmation. You have to find reasons NOT to take the trade.
- Not picking a stop-loss and target before taking the trade. For example you might place a stop-loss 1 USD below your entry, but there could be a huge resistance 1 USD above the entry. The Risk:Reward is not ideal.
- MONEY MANAGEMENT IS KEY! Don't risk more than 1-2% of your account on a trade, one mistake often costs people 50% or more of their account.
- FOMO, when a stock is showing 5 consecutive green bars and the price exceeded the average daily range, it's probably not a good idea to go long. Wait for some consolidation, the stock usually needs resting time!
- Multiple time frame analysis, if you're looking at a 5 minute chart and it's bullish, it could still be bearish in the long term. Always analyze multiple timeframes.
- TAKE YOUR DAMN STOP LOSS! I admit, I have gotten emotional and kept lowering my stop-loss. Sometimes it's best to accept that you're WRONG. The market decides what the price will do, if the price breaks a critical support area, then obviously buyers aren't interested.