What is the Number One Mistake Traders Make?
Big financial market volatility and growing access for the average person have made active trading very popular, but the influx of new traders has met with mixed success.
There are certain patterns which may separate profitable traders from those who ultimately lose money. And indeed, there is one particular mistake that in our experience gets repeated time and time again. What is the single most important mistake that led to traders losing money?
Here is a hint – it has to do with how we as humans relate to winning and losing
Our own human psychology makes it difficult to navigate financial markets, which are filled with uncertainty and risk, and as a result the most common mistakes traders make have to do with poor risk management strategies.
Traders are often correct on the direction of a market, but where the problem lies is in how much profit is made when they are right versus how much they lose when wrong.
Bottom line,traders tend to make less on winning trades than they lose on losing trades.
Before discussing how to solve this problem, it is a good idea to gain a better understanding of why traders tend to make this mistake in the first place.
A Simple Wager – Understanding Decision Making via Winning and Losing
We as humans have natural and sometimes illogical tendencies which cloud our decision-making. We will draw on simple yet profound insight which earned a Noble Prize in Economics to illustrate this common shortfall. But first a thought experiment:
What if I offered you a simple wager based on the classic flip of a coin? Assume it is a fair coin which is equally likely to show “Heads” or “Tails”, and I ask you
