One of the most common fatal mistakes that traders will make is to use far too much leverage. Unfortunately, the retail trader has nobody to keep them from doing this, which means that they need to use an extreme amount of self-discipline. In fact, major trading houses around the world have risk managers they keep traders from taking on too much leverage, as the temptation is far too great for most people.

The common fatal mistake for traders is to become a system hopper. What I mean by this is that they go from one system to the next, not giving a system enough time to work out. After all, most systems will take losses occasionally, and unfortunately, it’s likely that the beginning trader would be prone to abandoning a system after a loss or two. There are literally thousands of systems available on the Internet for free that traders can choose from. Quite often, they’ll find a system on a trading forum that seems to do well, but once they get a couple of losses, they abandon ship. However, some of the longest surviving systems do work over time, but the trader won’t allow the statistical probability to work itself out.

I would say that the most dangerous thing to do as a trader is to chase the trade. Unfortunately, this is an extraordinarily common event, as people are trying to become wealthy overnight. Generally, by the time the overall public gets wind of a trade, it’s far too late. As I write this article, the most recent mania is Bitcoin. While it is easy to say that Bitcoin should continue to go higher, when you look at the charts, something else is obvious: buying at this high level is essentially “chasing the trade.”

A simple and common rookie level mistake would be trading during the wrong hours. What I mean by this is that some markets don’t necessarily have the liquidity during certain times of the day in comparison to others that is necessary to have an orderly or even fluid market. There are a multitude of markets like this, and I cannot tell you how many times this has cost somebody either money, or mental capital when it was completely unnecessary.

One of the quickest ways to lose your account is refusing to admit when you’re wrong. In trading, this is taking your losses. You set a stop loss for reason, when you recognize that your thesis is wrong, and that the market is moving against you. If that’s the case, there is no reason to wait to take your losses as the market will continue to work against you, only compounding the situation further. Because of this, it’s very likely that you will eventually get a margin call, which is the end of your trading. You cannot become a profitable trader if you do not have a trading account. It’s that simple. Markets tend to trend for several years at a time, so this is why traders always say, “never trade against the trend.” However, that’s not to say that you won’t get the occasional pullback, or perhaps even an impulsive move in the other direction. That impulsive move in the other direction can wipe out your account if it goes on long enough. Or even worse, you may find that you are caught in a trend reversal, which is absolutely toxic if you do not admit that you were wrong and get out. I know of no worse way to trade than to simply wait for the market “to do the right thing.” The markets are littered with the corpses of traders who have tried to outsmart everyone else, and simply refuse to admit that they were wrong. Typically, this comes down to pride and greed. Eventually though, the pain becomes too real, and traders will take their loss, albeit at a much heavier cost than was necessary. By all means, if you are stop loss is about to be hit, let it. In the end, you must be in the game to make money.

Unfortunately, over the last several years, Wall Street has made a living convincing traders to “dollar cost average.” Dollar cost averaging simply means to add to a losing position. The idea, in theory at least, is that when the market turns around you will have a larger position on the way back up, meaning that you regain your losses quicker, and then eventually have even larger profits. While this is a nice thought, when it doesn’t work it typically leads to an absolute disaster. Wall Street has told investors that dollar cost averaging is the way to go. However, what makes that scenario different is that it is based upon a much longer timeframe. Typically, somebody who is dealing with a stockbroker is thinking along the lines of retirement, and that quite often is 40 years away. Because of that, the market should eventually turn around and therefore dollar cost averaging makes sense. But with a trader, it’s going to be completely different. This will be especially true if you are trading a leveraged instrument such as Forex or the futures market. This is because leverage works both ways, both for and against you. If the market is moving against you, the losses can pilot just as quickly as the gains can when you are correct.

One of the biggest mistakes that traders make is being undercapitalized. Just because you have the minimum margin to take a position, doesn’t mean that you should. After all, we all know that a position moving against you in a leveraged market works very quickly to drain your trading account. Unfortunately, most beginning traders are brought into the markets with promises of insane returns, some even saying as much as 500% a week! Unfortunately, traders will often bring more money into the market then they will common sense, not recognizing what the idea of doubling your money every week truly entails. After a few years, you essentially have all the money in the world. Does this seem possible? The problem is you will eventually have a losing trade. Once you do, it will absolutely wipe out the account with no qualms. You cannot turn $1000 into $1 million anytime soon. You will eventually lose money, and the only way to get levered up enough to make that kind of money is to go overboard. Compound interest is not work in your favor when you are over levered, and by not having much in your trading account and trying to trade the large contracts, you are by definition over levered. There is a reason why large trading firms do not allow their traders to take on more than 10 to 1 leverage. Unfortunately, most Forex brokers will offer way beyond that, and sometimes even as much as 1000 to 1. It does not take much in the way of losses to wipe out your account if you are taking advantage of that leverage with very little in the way of trading capital.

A fatal mistake that many beginning traders will make is that they don’t understand the fundamentals of a market. While some traders can be technical traders alone and make a nice profit, they are still aware of the underlying fundamentals of the market. You don’t have to be a fundamental trader or even an expert to understand this, as some markets have major events or even seasonality that come into play. For example, natural gas markets tend to do much better during the months of October, November, and December. This is because they are looking at the cold weather in the northeastern part of the United States where there is a massive amount of demand. The commodities markets work in concert with futures markets, so therefore they are looking ahead to demand. This is why that although it is still very cold in February, natural gas pricing tends to fall. If you know nothing about the underlying seasonality fundamentals of natural gas, it’s easy to get sucked into a bad position. There are other markets that have seasonality as well, especially when it comes to commodities. However, there is also some currencies that have seasonality such as repatriation of money back to Japan. Because of this, it’s likely that if you do not understand any of this, you can find yourself in trouble. If you blindly trade this market, without knowing some of the statistical probabilities, you can find yourself in a lot of trouble. You also have this appear in the stock markets, as the company’s financials and of course earnings come into play. Be aware of these, and then trade the technicals accordingly.

At one point or another, all traders will make this mistake. By not paying attention to the news flow, you can find yourself on the wrong side of announcements very quickly. In a leveraged market like Forex, this could be absolutely fatal to your account. This is because liquidity dries up, as most large traders will step away from the market until they get clarity. There is a plethora of potential announcements, but luckily there are good calendars online that can tell us which ones can move the markets the most. In this example, I’m using the Forex Factory website calendar, but there are others that are just as useful. You can see that some of the announcements are color-coded with red, making them a high-level event. On a site such as Investing.com, they may use a star system. Either way, this gives you an idea as to how important an announcement can be, and when to be careful getting into the market. This is because you may have a sudden whipsaw with pricing, and if you are not expecting it, you can find yourself in a bad trade almost immediately. Looking at the EUR/USD pair, you can see that we ended up going higher initially after the Nonfarm Payroll Announcement for the month of October, but turned around to fall rather drastically. Imagine being overleveraged in a position and putting it on just a few minutes before this announcement. It doesn’t take much in the way of imagination to realize how quickly your account could go from positive to negative, and how stressful trading ahead of this announcement could be. There was a time when traders would use announcements to get involved in the market, but those days are long gone. It’s not necessarily that you should close positions ahead of announcements, but you should at least take precautions to protect your account. The first precaution that you should take is always make sure that there isn’t some kind of major announcement coming out right after you put money to work.