According to ESMA, between 74% and 89% of private traders sustainably lose money in trading. For active day traders this rate is even worse.
Read here what are the three most common trading mistakes made by day traders and how you can avoid them in your trading.
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Trading Mistake 1: Constant Position Size
This is about the number of units traded per trade and the phenomenon that the majority of private day traders always trade the same number of units. This is despite the fact that the market risk (=points/pips that are allowed to lose) varies from trade to trade.
Mistake category: Mistakes are recognized, but are of no importance for the own trading behavior.
Most search results of risk per trade on Google and also many book authors like Van K. Tharp, define the risk per trade either as a fixed percentage of the account size or as a fixed risk in money like e.g. 200 Euro risk per trade.
Although this is the majority opinion and also implemented by us in the trader education or in our trading signals, most private traders trade with a fixed number of units per trade.
E.g. always 0.5 lots in EUR/USD or always 1 CFD in DAX or always 50 CFDs in Dow Jones.
Why do most private day traders trade this way?
First and foremost, this has a simple, technical cause: the one-click ticket. There, the first thing you do is to set a fixed trading quantity and then you can buy or sell very conveniently with this quantity.
Other reasons are that the implementation of a fixed trading amount is very simple and that most traders want to practice the correct entry into the market first and care about the correct trading amount later.
Unfortunately, the correct position has an importance of more than 60% of your trading success and should always be set correctly!
Correct position size versus fixed quantity
Example 1: Loss trade in the DAX
Trader 1: 200 € per Trade | Trader 2: Always 5 CFDs | |
|---|---|---|
Quantity of CFD´s: | 8 | 5 |
Result: | -200 € | -125 € |
Example 2: Profit trade in the DAX
SL = 10 points; TP = 23 points, CRV therefore 23/10 = 2.3
Trader 1: 200 € per Trade | Trader 2: Always 5 CFDs | |
|---|---|---|
Quantity of CFD´s: | 20 | 5 |
Result: | 460 € | 115 € |
Conclusion on trading error "Result of the two trades:
50% hit rate ; CRV of 2.3 (= very profitable strategy) position size"
Trader 1: 200 € per Trade | Trader 2: Always 5 CFDs | |
|---|---|---|
Trader 1 | -200 € | -125 € |
Trader 2 | 460 € | 115 € |
Total | +260€ | -10 € |
Conclusion of the "constant position size" trading error
The very profitable strategy in our example becomes negative with "Trader 2" due to the constant position size!
Correct choice of position size according to monetary criteria is therefore extremely important!
P.S. Feel free to swap profit and loss trades. I.e. example 1 is negative and example 2 is positive. You will be amazed at the result!
Trading Mistake 2: Bad CRV
Mistake category: Mistakes are detected, but cannot be stopped.
Most traders know the phrase: "Let profit run and limit the risks".
True to this motto, we and many other traders such as the legendary Turtle Traders trade with a rather high CRV, which is 2 or higher.
The advantage of this is that we get by with a lower hit rate, so we can be wrong more often than right and still be profitable on balance.
Especially when unpredictable news like a political twitter message suddenly moves the markets, this kind of trading is advantageous.
Nevertheless, experience shows that most private day traders realize small profits and let losses run in the hope that the price will turn in the right direction.
That is why it is so difficult for us to limit and realize losses.
Profits are realized quickly because the fear is big that the trade could still run into the 2.3 times more painful loss.
Possible solutions
- Work with exit orders (limit/take profit) instead of manual closing, which is psychologically difficult for us.
- Slowly increase the distance to your profit target (TP) so you can get used to letting the profits run.
- Define BEFORE a trade where your TP should be and how the trade should be managed.
- Avoid trade evaluation during the trade. You have given sufficient (and more rational) thought beforehand.
Trading Mistake 3: Wrong expectations
Mistake category: Mistakes are not detected.
Most forum entries and posts on the Internet are posted by amateur traders. Therefore, false expectations manifest themselves in trading.
Examples of expectations you hear or read that then manifest:
- "I'm already happy with 2% returns per day."
- "Only 10 pips a day, that's all I need."
If a trader builds up such expectations, they will only ever be disappointed and will sometimes discard successful strategies because they do not meet the above requirements.
They will be dissatisfied and will not be able to focus on the really important things.
Conclusion
- Daily safe returns, as they are touted or sold by some traders are not possible in the long term, in between it is.
- If you hold your equity as an active day trader, i.e. you make no losses and no profits, you already belong to the 10% best traders.
- Performance curves always fluctuate and drawdowns are part of it. Nobody gives us anything in the market.
- Be also proud if you make small profits, then you are on a good way.
- Heed the tips from this post, just the right choice of position size is immensely important as explained.
