Many traders lose money because of trading mistakes that are easily avoidable.
Popular trading mistakes include: trading too large, getting greedy, having a bad trading strategy and a lack of discipline.
This post teaches you some of the biggest trading mistakes that traders make.
By learning what NOT to do, you can improve your performance.
Although I'm an experienced trader, I also make mistakes and try to learn from them.
Remember that you can do everything right, but you won't win every single trade.
Your goal should be to place trades which have the highest probability of profit.
By trading a strategy (such as selling option premium), you can learn how to be consistently profitable.
Although I believe that all day traders lose money (and that day trading is gambling), even day traders will win ~45% of their trades. As a result, it's important to avoid making bad trades, with low probability of profit, and developing bad trading habits.
Being a successful trader is less about winning every trade, and more about having a strategy that you can consistently replicate.
They say that "95% of all traders fail", but you don't need to be one of them.
In this blog post, I will share with you the biggest trading mistakes I have observed from unsuccessful traders so that you will learn to not commit the same mistakes.
You'll learn why traders lose money and what to do about it
There are blogs about 10 Reasons Traders Lose Money In The Market, unfortunately blog posts like that do NOT provide actionable advice that will help you make money and become a consistently profitable trader.
Trading Mistakes (Key Points)
- You need to learn valuable skills in order to make money trading options
- The biggest trading mistakes that I see traders make in the stock market is that they have a bad trading strategy. Day trading and trading forex will leave you poor.
- Just because you make money in a trade doesn't mean that it was a "good" trade!
- If you want to become successful in options trading, you need to sell option premium, be disciplined, not trade too large and BUY options during periods of low volatility
- Successful people are better at accurately assessing probabilities of expected outcomes, and then they invest a large portion of their portfolio in only the BEST opportunities
Why Traders Lose Money
You need to have skills in order to make money trading options (hope is not a strategy)
One of the biggest trading mistakes that I see traders make is that they make dumb trades and think that they have to "trade often" in order to make money.
The opposite is true... patience and discipline are extremely important when trading.
While trading is actually very simple (in my opinion), people tend to over-complicate things.
I see traders posting on Facebook groups about making money with low-probability trades.
These people always seem to be successful traders online, yet in real-life...not so much.
For example:
A trader may make money by buying a call option on Amazon. They take a screenshot and post it to a FB group, expecting praise from other members.
In my opinion this is a very big trading mistake because whether that person makes money or loses money on that trade, buying calls for speculative purposes will NEVER have a positive expected outcome.
This trader will lose money in the future because the probability is heavily skewed against him (except in certain situations).
He may win 3 out of 10 times, yet the 70% of the time that he loses money will quickly bankrupt him.
By trading this strategy, he is building bad habits.
The few trades that were profitable were not skill, rather it was luck.
His strategy sucks and he's wasting his time and money.
He may study chart patterns or review market conditions and believe that a "secret strategy" exists that will increase his trading win rate.
He will continue to trade his poor trading strategy and try to increase his win rate, yet he will continue to lose money and is doomed to fail.
He thinks he has a good trading strategy that will eventually yield profits, however the expected probability from his trading will likely never improve.
Selling Option Premium Reduces Trading Mistakes
Traders are very bad at assessing expected probabilities and predicting how likely something will happen.
For example:
Many people are spending $200,000 on a college degree yet after graduating they work in real estate or another job that didn't require a college degree (college is a waste of time and a scam).
Students realize that they didn't even need to go to college and spend ~$200,000 and accrue massive debt.
They'd have been better off spending that four years learning valuable skills.
The point here is that, people misattribute how beneficial college could be to their lives.
And they do the same thing with trading. They believe that if they study and invest time in learning "technical analysis" and "charts" then they will make money.
This is false.
"While trading is actually very simple (in my opinion), people tend to over-complicate things." - David Jaffee, BestStockStrategy.com
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Why Do Most Traders Fail? (Trading Mistakes)
What separates successful traders from unsuccessful traders?
Successful traders make decisions based upon assessing future likelihoods of an outcome, and then they take action.
Many traders enter trades that they're not confident in, and then they lose money.
Or worse, they enter a bad trade, make money, and then think that they have found a tradeable strategy.
Do NOT misattribute the probability and the expected outcome of your behaviors. Instead, you need to make good decisions.
Unsuccessful people are not as accurate in making judgments and assigning probabilities to expected outcomes.
If you make poor decisions when trading, you're virtually guaranteed to lose money over the long-term.
Trading mistakes lead to stress and loss of financial security.
The point here is that, whether you want to be successful in life, relationships, or as a trader, a major component is making good decisions and being more accurate in assessing probabilities and expected outcomes.
If you have a bad trading strategy, a few profitable trades do NOT mean that you're skilled.
Instead, you should STOP trading a low probability strategy because you will lose all your money eventually.
Option Trading Trading Mistakes Tips
- The biggest mistake that I see traders make is that they misassign probability levels and attribute good outcomes to skill and bad outcomes to bad luck
- Some traders think they have skills when in reality, they made money based upon the expected probability and random outcome of the trade
- Whether you want to be successful in life or as a trader, a major component is knowing how to be more accurate in assessing future outcomes
- Sign up for Trade Alerts – Receive real-time trade alerts so that you maximize your profits and minimize your mistakes; we have a Trial Offer of $19 for 7 days.
"DO NOT misattribute positive outcomes to skill when it could be luck." - David Jaffee BestStockStrategy.com
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How to Avoid Trading Mistakes
One thing that you can do to improve your overall life is always ask yourself:
"Is this result based on luck or is it an outcome based upon skill that can be replicated?"
Another thing is to make decisions based on the expected outcome.
If an outcome has a very low probability of being successful but the payoff is very high, then perhaps it's a worthwhile endeavor if the downside is limited.
When we sell option premium, we have a very high probability of profit, yet a small payoff.
In essence, we hit singles and we do not try to hit home runs.
When trading, it's very important to SELL option premium because the probability of profit is incredibly high.
What Percentage of Option Traders Make Money?
If done correctly (with patience and discipline), I believe that 90%+ of options sellers can make money.
You will not be rewarded for jumping in and out of trades. Instead, you will lose money.
I make around 2 trades a week.
Reasons Why Forex Traders and Day Traders Lose Money
The day trading success rate is close to 0%. Almost ALL day traders lose money.
I've heard that "95% of traders lose money", in actuality, that number is close to 100%.
The day trading success rate is close to 0%.
Can retail traders make money? NO
All of those guys who claim to make money day trading are fake gurus, frauds of front-running their followers.
Don't believe me?
Check out these 2 studies:
Day Trading Studies
According to Emmett Moore from TradingSchools.org, in his Day Trading Scam article:
The Sao Paulo School of Economics commissioned a study that tracked a total of 19,646 day traders from 2013 through 2015. The data was broken down into bite-sized chunks to better understand the data.
The first group of day traders totaled 1,111 individuals that day traded only a single day. Of this group, 29.8% achieved a profit.
The second group of day traders totaled 9,978 individuals that day traded between 2 to 50 days. Of this group, 15.5% achieved a profit.
The third group of day traders totaled 3,100 individuals that day traded between 51 to 100 days. Of this group, 8.9% achieved a profit.
The fourth group of day traders totaled 2,738 individuals that day traded between 101 to 200 days. Of this group, 6.8% achieved a profit.
The fifth group of day traders totaled 1,168 individuals that day traded between 201 to 300 days. Of this group, 5.4% achieved a profit.
The sixth group of day traders totaled 1,151 individuals that day traded greater than 300 days. Of this group, 3.0% achieved a profit.
What does this data suggest? Ironically, the data suggests that the odds of achieving day trading success is nearly identical to playing roulette at a casino. The more you play, the greater the likelihood that you will lose everything.
The social scientists were particularly surprised to discover that ‘learning’ played nearly no part in the results. For instance, it was assumed that if a person had traded 6-months and 200+ trades, that they would learn to trade better or improve upon their trading strategies to achieve greater success because they were “learning from experience.”
And this is just what the trading educators want us to believe…that we need to “learn” and over time, this “learning” will improve our results. But the data absolutely destroyed these assumptions. In fact, the more a person “learned” to trade, the worse their performance became. It seems like “practice makes perfect” does not work in day trading Futures markets.
The Brazilian traders that actually earned an income
We all know that some folks, through luck or skill, are going to achieve success. Let’s take a look at those figures now…
The first group of successful day traders totaled 17 individuals that earned an average of $16 per day.
The second group of successful day traders totaled 8 individuals that earned an average of $54 per day.
The third group of successful day traders totaled 1 individual that earned an average of $310 per day.
But here is the sad part…of these successful Futures day traders, the standard deviation of their daily profit ranged from $632 to $3,308. What does that mean? In other words, in order to consistently earn $80 per day, you would also have to experience massive daily fluctuations of between $632 and $3,308.
And based upon the data, only one person was able to earn more than a minimum wage job.
It gets worse
For those 1,151 day traders that persisted 300 days, 97% lost all of their money once commission was factored in.
Even the highest performing trader that earned an average of $310 per day ended up barely profitable once the commissions were factored in. How sad are these numbers?
In conclusion, the study stated that “It is virtually impossible for an individual to day trade for a living, contrary to what the brokerage specialists and course providers often claim.”
So what should you do?
If you are stuck in that sad wheel of constantly funding a day trading account, and constantly looking for a new ‘Guru,’ then perhaps its time to put the mouse away. At least for a while.
The sad and sorry truth is that day trading is mostly a scam. Yes, some can pull it off successfully. Just like how some people will be cured of cancer by drinking apple cider vinegar. But the overall scientific data put the odds at roughly equivalent of playing roulette. The more you play, the greater the likelihood that you will lose everything.
Trading Mistakes: Lack of Patience
Options traders, especially new traders, frequently lack patience.
They trade too often!
I've created this UPDATED VIDEO to explain some of the biggest trading mistakes that I've encountered.
Conclusion: Options Trading Mistakes
We all make mistakes, we just need to learn from them.
The main takeaway from this options trading mistakes post is that:
You have to make sure that you are not misassigning probabilities and misattributing positive outcomes to skills when it could be a random outcome / luck.
This is how the day trading and forex fake gurus steal your money.
That is the biggest mistake that I have observed that is inhibiting people from being successful traders.
People will day trade, and think that they can improve their profitability yet regardless of what they do, they will likely never be consistently profitable day traders.
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Frequently Asked Questions (FAQs)
What are some option trading rules?
1) Sell option premium on large capitalization stocks with strong brands.
2) Do not trade too often
3) Buy options as a hedge, and for protection, during market extremes. This will reduce portfolio volatility.
How to minimize loss in option trading?
The best way to minimize loss in option trading is to not trade too large, you need to ensure that you leave enough buying power so that you aren't forced to close out positions for a loss.
Buy options (puts) during periods of low volatility and buy calls during periods of high volatility.
What's the best options trading plan?
The best options trading plan is to sell options on stocks that you want to own, not trade too large and to buy options during periods of market extremes.
Is it okay to buy options?
Yes, it's okay to buy options. My thinking on this topic has evolved. Previously I was against buying options but I now believe that buying options is extremely important to reduce portfolio volatility.
