3 Cardinal Sins Of A New Trader
The Pandemic and 2020 brought a whole new demographic to the US stock and crypto markets, and as we saw on forums such as Wall Street Bets, making money seemed "easy" with Jerome Powell and the Federal Reserve's unlimited QE (quantitative easing). The sharing of gains between friends, family, and social media added more fuel to the fire, bringing even more people into the market every day. The behavior of these new "investors," in normal market conditions, would be described as "throwing money out of the window", but in this perfect storm, for maybe the first time ever, more money came back to them.
New traders make a wide variety of mistakes, but the most important one, believe it or not, is making large sums of money. While it may seem counterintuitive since we are all in this market to do just that, making money in the short term would be the very reason their portfolios would end up either significantly red or at zero come 2023.
Why is that? Did they suddenly lose their "skill"? Not necessarily since new market participants don't understand the complexities of the markets and trading anyway. We could simply define the issue as not being able to react to changing market conditions, but the problem is much deeper than that.
When trading, short term, long term or even scalping, professional traders use a system that they have built, which includes a very specific set of rules in order to give themselves an edge in the market. As Mark Douglass would put it, "an edge is nothing more than one outcome having a higher probability of occurrence."
These new traders had no built-out system and due to lack of experience weren't able to understand WHY trades went in their favor or against them. In 2020 it did not matter, but now it does.
So what does a new trader need, or what mistakes do they need to avoid?
They need ONE system: So many new investors will approach the market every day, make money or lose money and then move along while trading with a strategy that they think is going to make them rich. When they go on a losing streak, they blame the system or the market and not the true cause of losing, themselves. As I have mentioned in previous articles, traders may THINK they are following their rules, but upon further review when JOURNALING, they come to realize that many of their losing trades do not fit within the rules they have set up for themselves. Strategies and systems work for a reason (they give you an edge over time so stop focusing on if one trade is profitable or not, think about the next 100 trades). Stop jumping around to different things you think will yield a magic fix since you are the problem most of the time; the same issues will arise with each different strategy you hop to.
Too Much Risk: All new traders take on too much risk. You are NOT going to get rich in a day, but you can surely lose your entire portfolio. Trading is a long-term game, and if new traders are focused on flipping their account rapidly, they are losing more money than they are comfortable with using a system they don't fully understand yet. More money in your account does not make you a better trader; almost everything we do in the market at its core is learning how to properly manage portfolios and money. Sizing down allows new traders to focus on the fundamentals and the mechanics of good trading while setting the dollar amounts aside.
Laziness: Traders see the amounts of money that can be made very rapidly in the markets and assume or hope for that one big hit to boost their portfolio. By the time that comes, that one big
New traders must avoid the cardinal sins of having no consistent system, taking on too much risk, and being lazy in their pursuit of success. Developing a solid trading strategy, managing risk effectively, and dedicating time and effort to learning and improving are crucial for long-term success. By addressing these common pitfalls, new traders can increase their chances of becoming successful, disciplined market participants who adapt and thrive in various market conditions.