Mistakes That Swing Traders Need To Avoid While Bidding

Last Updated August 13th 2021
7 Min Read

Trading is rife with risk. However, there is no dearth of opportunities too if you play your cards right. Experienced traders will say that it is easier said than done. It takes a lot of diligence to succeed in trading. Of course, you are bound to make some mistakes now and then. But, if you learn from them, or better, learn from the mistakes of others and avoid repeating them, you can become a successful swing trader.

Look Out For The Mistakes

Many traders sabotage their trading because of ignorance – they repeatedly make the same mistakes until it becomes too serious to ignore. While it cannot be a pleasant experience finding yourself in deep trouble, the good news is that if you look out for signs, you can stay away from most of the problems and enjoy great success. There are certain blind spots which many traders fail to recognise.

If you are aware of them, you can take steps to avoid them and enjoy greater chances of success as a trader. Here are some of the common mistakes traders commit while trading:

  • Overconfidence
  • Overtrading
  • Overleveraging
  • Overexposure
  • Overriding Stop Losses

Let’s take a detailed look at each of them and see how you can avoid them:

Overconfidence

Few are the people who have not suffered from overconfidence at least once or twice in their lives. In the case of trading, if a day has gone exceptionally well and when everything has gone your way, it is likely that you get overconfident of your ability and take some bad decisions based on that. You might end up bidding far more than you can afford. If such a thing happens, it is likely to end in a disastrous result. Inflated belief in one’s own trading skills can never end in good results, especially if that’s the only factor in your favour.

It is important to remember that you must have some confidence in yourself if you are looking to become a successful trader. If you are confident, you are more likely to take reasonable risks or to look for opportunities. However, the moment your confidence becomes overconfidence, things will go awry. If you are overconfident, you might think you know everything there is to know about the market and you feel you will never lose. It is seldom the case.

While confidence can motivate and help you make the right decisions at the right time, overconfidence steals the power of rational judgment from you. That doesn’t auger well for trading. If you are overconfident, you are likely to:

  • Overestimate your capabilities
  • Be over precise and think you know everything
  • Over place your performance in comparison to others

You can minimise the effects of overconfidence by taking time to truly understand yourself and your capabilities. Be aware of your limitations and recognise that certain opportunities aren’t worth pursuing. One way to overcome overconfidence is considering the possibility that you are wrong, analyzing the situation & supporting data, and be ready to change your mind and decisions. Practice balancing confidence with humility.

Read Also: Complete Swing Trading Guide – How to Start and Learn to be a Swing Trader

Overtrading

Overtrading is when you trade too frequently or take extremely large trades, and/or take uncalculated risks. Overtrading is a sign of impatience. Successful trading requires loads of patience – it might take days and weeks before a good bidding opportunity materialises. The key is to remain patient for the right opportunity and protect the capital while you wait.

If you bid indiscriminately without analyzing the opportunity, you are likely to lose more than a good opportunity – you could end up losing your capital too. If you close a trade for a loss and you know deep down that you shouldn’t have traded, then you are overtrading.

Likewise, if you are supposed to trade from the daily chart, but look into the hourly chart to find opportunities, you are overtrading. Likewise, when you spend hours on charts trying to force a trade with sufficient returns, you are overtrading. Merely looking at the charts can cause you to overtrade because you feel there is an opportunity you can milk when in reality there isn’t any. You are just chasing mirages.

Another way of overtrading is revenge trading – that is when you allow your emotions to overrun logic and reasoning. Never trade with your heart – always use your head while trading. It means that if you suffer a string of losses within a short while, you should quit instead of carrying on bidding in the hope of winning eventually. Don’t jump back into a new trade soon after a loss just because you feel you can flip it back into a profit.

Avoid overtrading by:

  • Being fully focussed and aware of the situation while bidding
  • Never trade if your mind is not in a good state. Avoid trading if you feel anxiety, boredom, panic, greed, or exasperation.
  • Have a trading plan and stick to it at all times
  • Think long-term – don’t fret over a couple of losses, even if they happen consecutively
  • Be patient and wait for the right opportunity

Overleveraging

Leverage is the process where you use a small amount of capital in your account, to open and control a much larger trading position. For instance, if you have $1,000, you might be able to open a $100,000 position. This is 100:1 leverage.

Leverage helps you magnify gains with a small amount of capital. However, the downside is that you’ll magnify your losses if things go wrong. If you trade with high leverage, a tiny swing in the price can wipe away your entire account balance. Higher the leverage, the greater the swings.

If you trade with little or no leverage, your trade will have room to breathe and protect your capital. You will be able to accommodate wider stop losses and keep your risk limited. You must be aware of the link between leverage and your account equity. It is well known that profitability declines significantly as true leverage increases.

Most of the expert traders with low true leverage seldom go above the 10:1, enabling them to stay in the game. It is well-known that most traders only risk 10% or less of their account balance at any time. Whenever you leverage, trade with caution. Excessive leverage rarely results in profitability.

Overexposure

If you have multiple positions open in your trading account with each position consisting of different options, make sure you keep an eye on your risk exposure. If there are two equal opportunities likely to offer you great returns, it is wise not to bid on both, no matter how great the returns seem. You must be sensible and pick the one you think can give you results.

You might be tempted to bid for both, the reasoning being if things go right, you’ll make a handsome profit. However, contrary to your belief that you are diversifying the risk by investing in two opportunities, you are actually increasing the risk.  

When you expose yourself to more risk than necessary, it is called overexposure. You need to understand the working of the market you are in to avoid overexposure and unnecessary risk.

Check Out: Is Swing Trading Profitable? Top 5 Factors of Making a Living as Swing Trader

Overriding stop losses

Stop losses are impending orders you enter to effectively close out your trading position(s) if your losses hit a predetermined price. They are great tools to minimise your losses in case things don’t go your way. It can be difficult to acknowledge things are going wrong but the sooner you acknowledge it the lower will be your losses.

A certain degree of mental toughness and self-control is required to stick to your stop losses. However, it is likely that in an intense situation, you will lose your objectivity and override your stop losses. When that happens, you are more likely to lose more than you had provisioned for. You must always be wary of overriding stop losses, especially if you are new to the trade. That way you can minimise your losses.

Remember that stop loss is there for a reason. You have set it up to help you get the most out of your trade and not to lose unreasonably. Never think the market will turn magically just in time for you to reap profits. Make use of your stop loss and get out as soon as the market reaches your stop.

Do not widen your stop in the hope that the market will turn. If you increase your stop, you will increase your risk and your losses. If the market hits your stop, your trade is done. Take the hit and move on before you harm your account any further.

Conclusion

To sum up, it is quite easy to make the various mistakes mentioned above while swing trading. The key to successful trading is to be aware of these mistakes and minimise them. You will likely suffer some loss in the bargain. But, if you are wise enough, you will recognise your mistake and cut your losses. That way even if you cannot be successful 100% of the time, you can come close to becoming a successful swing trader.

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