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The Most Common Trading Mistakes and How To Avoid Them

When it comes to trading, there are many mistakes that can and will be made along the path to success. Luckily, understanding these common mistakes can help you manage your shortcomings and navigate the markets like a pro. In this blog, we’ll be highlighting the most common mistakes made by traders and explaining how TrendSpider can be used to mitigate all of them! Let’s dig in!

Having a keen understanding of the most common mistakes that traders make is key to avoiding them yourself. Let’s discuss these mistakes and how they can be managed!

Mistake #1: Not Understanding The Current Trend Of The Market

The first mistake that most traders tend to make is not understanding the current trend of the market. There are many different tools that can be utilized to understand the current trend, but one of the most common is the Moving Average indicator.

A Moving Average Ribbon indicator is visualized on the chart below, displaying five moving averages of varying lengths. Traders can set the lengths to any values they’d like but it is generally recommended to utilize an even distribution of short and long lengths.

As you flip through the symbols in your watchlist, you can very quickly see where the price is relative to each of these moving averages and where they are relative to one another. If the price is trading above the moving averages and they’re in alignment, meaning they’re in order from top to bottom, shortest to longest, then the asset is in a strong uptrend. This is visualized in the below image.

This is an image of bullish trend alignment.
If the opposite is true and the price is trading below all of the moving averages and they’re in alignment from longest to shortest, top to bottom, then the asset is in a strong downtrend.

This is an image of bearish trend alignment.
In choppy or sideways markets, the price tends to fluctuate around the moving averages as they cross back and forth in no discernable trend.

This is an image of a lack of trend alignment.
Traders can take this trend analysis a step further by utilizing the Multi-Time Frame Analysis (MTFA) functionality, which allows you to see your indicators on two time frames on a single chart at once. If this same alignment is visualized across multiple time frames, as in the image below,  the strength of the trend is even greater.

This is an image of trend alignment with multi time frame analysis turned on.
If that’s too many indicators on the chart for you, try inputting your moving average conditions into a Smart Checklist and remove the indicator from your chart altogether. If a condition is true, a green block will be visible next to it. If all the blocks are green, all the conditions are true and the asset is in trend alignment. 

This is an image of a smart checklist showing trend alignment.

Mistake #2: Not Having A Trading Plan

Now that we’ve learned one simple way to determine the current trend of the market, we can begin to plan out our trade. This leads us to the next mistake that most traders make, which is simply not having a plan. 

If we know the current state of the market is trending up, we want to be considering long positions. This means we need to be looking for bullish entry conditions. 

If you don’t have setups that you like to trade and you need help picking out some potentially bullish entry conditions, you can utilize the Market Scanner which contains presets for many different types of setups. Typing ‘Bullish’ into the search bar will yield all of the relevant pre-built condition sets. 

This is an image that shows searching for bullish conditions within the shared scanner list.
You can select a preset you like, or input the conditions of the strategy that you like to trade, hit the scan button, and every name that’s currently meeting the criteria you’re scanning for will populate on the right-hand side. 

This is an image of scanner conditions.
Knowing all of these names is a great first step, but not every name performs the same under the same conditions. The Strategy Tester can be utilized to see how all the names currently meeting the criteria have performed historically.

Your scan results can be easily loaded as a Smart Watchlist on the right-hand panel of the platform so that the names are accessible. From here, the Strategy Tester can be opened and the scan conditions inputted as entry criteria. 

This is an image of the scanner with conditions and a smart watchlist.
As you click through the names in your Smart Watchlist, the results of the strategy will populate for each name and it can be determined which name performs the best, historically. 

Mistake #3: Not Managing Risk

Once you have a strategy selected and the names you want to consider trading it on, you’re just about ready to take a position, but before you do that, you must determine your take profit and stop loss levels. This brings us to the next mistake most traders make, which is failing to manage risk. 

Unfortunately, strong historical performance does not necessarily equate to strong future performance. With that in mind, risk must be managed, and this can be done in several ways.

First, traders can utilize the Risk/Reward drawing tool. With a click and a drag, you can place this tool at your planned entry and then measure out your price target and stop loss levels. 

A 3:1 risk-to-reward ratio is a common benchmark, so it’s a great idea to measure those distances and create alerts on both the ‘Target’ and ‘Stop’ lines. A Dynamic Alert can be set on any trend line, horizontal level, or indicator. If your stop loss level alert sounds, you know your trade idea is wrong and it’s time to exit. If the target alert goes off, you know it’s time to take a profit. 

This is an image of the risk reward drawing tool on a chart.
If you use a specific set of rules to define your exit, a Multi-Factor Alert can be created and the platform will monitor the set of conditions automatically for you.

Knowing where your trade idea is wrong is key to avoiding big losses, and taking the time to define these levels ahead of placing a trade is an important step that’s easy to miss in the excitement of the moment. 

Mistake #4: Not Understanding The Current Market Environment

Many factors can come into play when considering the current market environment. Time of day, News Events, Options Expiry, Economic Data, and so on. All of these outside factors can play a role in the performance of an asset, and for that reason, they must always be taken into consideration.

Tools like the Seasonality Widget provide deep insights into the performance of a stock over a specific time period. You can break down a stock’s performance by hour of the day, day of the week, week of the year or month of the year. 

This is an image of the seasonality widget.
It’s relatively common knowledge that the open and close of a session are often more volatile and the afternoon is less so, but Seasonality allows you to drill down and see the best-performing hours, days, weeks, and months for any asset.

This is an image that shows hourly performance of an asset via the seasonality widget.
In addition, the Data Flow tool can be used to maintain a birds-eye view of things like Unusual Options Activity, Insider Trading, Analyst Estimates, News, and more. For example, maybe you happen to notice strong call flow coming into a name and insiders also buying around the same time. These fundamental data points might provide the additional confirmation you require to establish a position.

This is an image that shows unusual options call buying and insider buying as well.

Mistake #5: Relying On Other Traders For Ideas and Execution

Finally, the last but arguably the most detrimental mistake that traders make is relying on other traders to tell them what to do and when to do it.

There are certainly some great minds out there, and there is no shortage of traders posting their big wins, but at the end of the day, it’s up to you to push the button. We all have different risk tolerances, skill levels, and account sizes. If you’re going to make it as a trader, you’ll need the understanding that comes from managing your trades on your own, from ideation all the way through to execution.

Conclusion

Using the tools outlined in this article, you will be able to avoid all of the most common mistakes that traders make, thus setting yourself up for success in the markets! 

The Most Common Trading Mistakes

If you have any questions about the platform, feel free to reach out to us via the ‘Contact Us’ button in the bottom right-hand corner of your chart view.