There are many common mistakes that prevent amateur and professional alike from actualizing their full potential and profit. Trust that I am not finding fault, as I am guilty of such errors as much as the next person, and find myself writing this as much for myself as for you the reader.

Trading is as much an emotional and mental state of mind as it is a matter of your knowledge and decision making. To make matters more frustrating, most mistakes traders make that inhibit their profits are their own fault. It is very easy to blame a broker for a bad fill that set out a long chain of events and made making money impossible, when in fact it is usually something stupid and easy to fix.



After much time spent with many hundreds of beginning through advanced traders, I have found a lowest common denominator that covers several areas, which I will address. We are all unique individuals who bring our own strengths and weaknesses to the table, so there are as many errors in trading; however, many of the more common mistakes will be addressed below.



BIGGEST MISTAKES I HEAR FROM OTHERS:



Taking a Profit Too Early

"I have to take this profit before I give it back." This is probably the second most common mistake I hear people make. Once a trade has begun to make a comfortable profit, it is human nature to want to seize the profit so it is locked in and you can count your money. It is also human nature to have fear and apprehension about giving back the profit you have made. The obvious, but incorrect, solution is to simply "take the money and run," as the saying goes.



Taking a Profit Too Early

"I have to take this profit before I give it back." This is probably the second most common mistake I hear people make. Once a trade has begun to make a comfortable profit, it is human nature to want to seize the profit so it is locked in and you can count your money. It is also human nature to have fear and apprehension about giving back the profit you have made. The obvious, but incorrect, solution is to simply "take the money and run," as the saying goes.



Certainly everyone has instances where they got out of the trade and it was the right decision as the stock reversed afterward and you would have given back the profit. I would be willing to bet that the decision to get out was not based on the stock activity, technical or fundamental reasons, etc., but rather it "felt" like the right thing to do.

Certainly everyone has instances where they got out of the trade and it was the right decision as the stock reversed afterward and you would have given back the profit. I would be willing to bet that the decision to get out was not based on the stock activity, technical or fundamental reasons, etc., but rather it "felt" like the right thing to do.



If you have picked an underlying that is in a trend and that is why you got into the trade, then stick with it. The reason that you are making money is because you have boarded the correct bus. To get off at the first stop when your destination is many miles further away would be ludicrous, but that is what many people are doing with their trades. Wouldn't it make more sense if you were nervous about the bus perhaps turning around to keep riding it in the correct direction, and then get off only at the first stop after it turned around? The same thing should be done with directional trades.

If you have picked an underlying that is in a trend and that is why you got into the trade, then stick with it. The reason that you are making money is because you have boarded the correct bus. To get off at the first stop when your destination is many miles further away would be ludicrous, but that is what many people are doing with their trades. Wouldn't it make more sense if you were nervous about the bus perhaps turning around to keep riding it in the correct direction, and then get off only at the first stop after it turned around? The same thing should be done with directional trades.



I know that you will be giving back some of the profits you have acquired, but this is a trade off to capture even more of the move. It is almost impossible to get out at the best possible price, either the top or bottom. If you can usually buy/sell your position within $0.50 of the bottom/top, then you are a much better trader than I, and you do not need any help. Isn't it much better to keep taking the bus as far as it goes before it circles around and then get off at the first stop going back, then to get off the bus 20 miles too early?

I know that you will be giving back some of the profits you have acquired, but this is a trade off to capture even more of the move. It is almost impossible to get out at the best possible price, either the top or bottom. If you can usually buy/sell your position within $0.50 of the bottom/top, then you are a much better trader than I, and you do not need any help. Isn't it much better to keep taking the bus as far as it goes before it circles around and then get off at the first stop going back, then to get off the bus 20 miles too early?



Solution:

Solution:

If you were worried about giving back too much, simply hedge with options or trailing stops. Usually this will give you enough peace of mind to stay in longer.



Staying in a Loss Too Long

I have found most people who struggle getting profitable are doing so as a result of staying in a losing trade too long. This is the most frequent problem that traders sabotage their success with that I have found. This is a problem for almost every trader I have met no matter how experienced they are. It takes a lot of conviction in your opinion to invest money in a trade. There is an emotional and financial commitment made, and it is sometimes difficult to admit a mistake and get out. Admitting you're wrong is often the most difficult thing to do.

Staying in a Loss Too Long

I have found most people who struggle getting profitable are doing so as a result of staying in a losing trade too long. This is the most frequent problem that traders sabotage their success with that I have found. This is a problem for almost every trader I have met no matter how experienced they are. It takes a lot of conviction in your opinion to invest money in a trade. There is an emotional and financial commitment made, and it is sometimes difficult to admit a mistake and get out. Admitting you're wrong is often the most difficult thing to do.



Once you get out of the trade, never look back as that is how the bad habit forms. You look at that trade you got out of for a small loss and see that had you stuck in another 3 or4 days you would have been up money. This frustrates you and it gives you ammunition to justify staying in the next losing trade, but that one doesn't come back ? does it? Now you have lost more money on the trade than you would have made if the trade had been a winner and you need two or three winning trades to pay for the one loser.

Once you get out of the trade, never look back as that is how the bad habit forms. You look at that trade you got out of for a small loss and see that had you stuck in another 3 or4 days you would have been up money. This frustrates you and it gives you ammunition to justify staying in the next losing trade, but that one doesn't come back ? does it? Now you have lost more money on the trade than you would have made if the trade had been a winner and you need two or three winning trades to pay for the one loser.



Solution:

Before you ever get into a prospective trade determine ahead of time how much you are willing to lose on that trade. The great thing about options trading is that you can control your risk infinitely more times than if you were trading stock. Use this to your advantage.

Solution:

Before you ever get into a prospective trade determine ahead of time how much you are willing to lose on that trade. The great thing about options trading is that you can control your risk infinitely more times than if you were trading stock. Use this to your advantage.



Once you have determined how much you are willing to lose, stick to that number no matter what. Control the dollar value by adjusting the number of contracts, using stop orders, carefully watch the trade and/or use another trade to hedge the original. If you ever have any doubt that this works simply get a quarter to flip. On one side write down (-$1) and on the other side write down +$3. Now every time the coin lands on -$1 you have to take $1 out of your purse. Every time the coin lands on +$3 you put $3 in the purse. I bet if you flip the coin/trades enough, you will be profitable.



Not Enough Education

Another sticking point people have is getting lazy or complacent with their education. At some point along the time line people eventually stop learning for one of these two reasons. Some people get caught in a series of losing trades and the enthusiasm for trading they had dissipates. The insatiable thirst for knowledge they once possessed fades and they are stuck in a melancholy existence of going through the motions and learning a self-defeat acceptance.



Not Enough Education

Another sticking point people have is getting lazy or complacent with their education. At some point along the time line people eventually stop learning for one of these two reasons. Some people get caught in a series of losing trades and the enthusiasm for trading they had dissipates. The insatiable thirst for knowledge they once possessed fades and they are stuck in a melancholy existence of going through the motions and learning a self-defeat acceptance.





The other side of this coin is when people get a string of winners and rightly (or wrongly) believe that the success was based on their having enough competence in the markets to make it without any further education. Some people's string of winners could have been nothing more than luck or catching a good trend, and what they don't see would frighten them. At the Optionetics Market Making class a few months ago there were many Elite traders who had their eyes opened. When learning more about trading you can often find better ways to maximize profit and minimize loss by doing something slightly different than you may never have thought. I am just wondering what I don't know.



Solution:

Take a retake with an instructor you have never had, especially one known for teaching things differently than you are accustomed. Learn from as many places as possible. If you are fond of technical analysis, take a class or buy a book on fundamental analysis. Learn a new strategy that you have not tried before. When you find the trades you normally do are not lining up correctly, place the opposite trade (buy instead of sell) with small contract sizes to see how that works. Shake the tree up and see what falls out.



Solution:

Take a retake with an instructor you have never had, especially one known for teaching things differently than you are accustomed. Learn from as many places as possible. If you are fond of technical analysis, take a class or buy a book on fundamental analysis. Learn a new strategy that you have not tried before. When you find the trades you normally do are not lining up correctly, place the opposite trade (buy instead of sell) with small contract sizes to see how that works. Shake the tree up and see what falls out.





By taking losses sooner, letting winners run longer (with protection) and by continuing your education you will avoid the most common mistakes many people make that are preventable and which are speed bumps to your success. Mentioning them may sound remedial and common sense, but you would be surprised how often you violate these steps. I would wager that if you follow these three steps you find yourself a much better trader. Don't give up before the miracle.



Thank you and good luck trading.

Thank you and good luck trading.

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