The retail trading landscape has seen a monumental shift in the last 18 months, with unprecedented market volatility, technological advancements and changes in income structures all encouraging a retail investment boom. Since the start of 2020, retail trading as a share of overall market activity has more than doubled, from an estimated 15% to over 30%[1].

However, 83% of retail traders generally miss out on their trading goals by making the same sort of mistakes. It’s important for traders to learn from successful and unsuccessful positions. With that in mind, we look at these mistakes and set out five of the key dos and don’ts every retail trader should take into consideration:

1. Don’t: run your losses

Losses are an inevitable part of the trading process, but the most common error is to let losing trades run in the hope that the market switches in your favour. Failure to cut losses at the right moment often results in profits from other successful trades being completely cancelled out.

Stop Loss orders can be used to limit the risk on individual trades by automatically closing out a position once it reaches a certain level of loss. Similarly, Take Profit orders can help you cash in a profit at your target level. However, you should also bear in mind that Stop Losses are not guaranteed and may be subject to slippage and market gaps in volatile market conditions.

2. Don’t: change your position size too quickly

For the average retail trader, learning to scale up your position size in a timely fashion can be difficult, with traders regularly attempting to do this too quickly. It’s easy to be swayed into thinking you are trading too small, but increasing your position size at the wrong time can lead to unexpected and outsized losses. This is partly due to the fact that it quickly alters one’s trading psychology, which can have an adverse impact – more on that below.

To avoid this, you should first refine your trading strategy as much as possible and consider trading in small amounts initially to manage risk, before making the decision to increase your position size from there.

3. Do: have a plan and set parameters before opening a position

It’s vital to have a trading plan to act as a guide for the time and capital you are willing to invest.

In trading, knowledge is power: an important first step of any plan is to get to know the market within which you’re trading intimately before opening a position. This includes researching the type of market properly before committing to opening or closing and understanding the level of volatility in that particular market. Doing this due diligence will increase your chance of yielding a successful result, and definitely shouldn’t be underestimated.

4. Don’t: trade on emotion

It’s imperative to prevent emotions from clouding rational decision-making. This goes hand in hand with the above points, as too often emotion causes traders to deviate from their plan – whether that’s from overconfidence following a gain or despair after a loss. In such a case, traders may unnecessarily run an increasing loss in the hope it will eventually rise, even in the absence of evidence that this is likely to occur. Similarly, the buzz from a win could lead you to rush into another position with new-found capital without carrying out the necessary analysis first, having a counterproductive effect.

5. Do: practice patience

A trading plan doesn’t need to constantly win in order to be profitable, and no trader can be right all the time. A success rate of 50-60% can actually lead to a healthy trading performance over the long term. Trying to get rich quick by throwing funds at a few hot stocks and expecting swift returns will almost certainly fail in the long term. It’s important to bide your time and not act irrationally.

Likewise, it’s unwise to open too many positions in a short amount of time. While diversifying your trading portfolio can increase your potential for winning trades, it equally increases your overall exposure. Thinking in the long term and setting realistic goals for your whole portfolio goes a long way to counteract these errors.

[1] CNBC

Published: 8 October 2021

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.