In the trading world, one would presume that with the profusion of sophisticated charts, extensive fundamental analysis, and in-depth experience with price action, most traders would be profitable. However, the sobering reality is that most traders do not succeed. They instead contribute to the profits of the few who have mastered trading.

Success in trading isn’t solely about intelligence or charting skills. If it were, the trader with the highest IQ or the most intricate charts would be the wealthiest. The reality is much more complicated.

Here are 5 fatal errors made by misguided traders that often lead to their downfall.

Lack of a Trading Plan

A clear trading plan is essential for any trader. It should specify precise entries, exits, and position sizes before executing any trade. New traders may not have a trading plan before they begin their trading activities. Even if they have a plan, they may be more likely to stray from the defined plan than seasoned traders. Novice traders may reverse course altogether. Consider the case of a trader who enters the market without a plan, making decisions based on gut feelings. Initially, they might see some profits, but eventually, their lack of strategy will lead to inconsistent results and losses.

Chasing After Performance

Many investors and traders often choose asset classes, strategies, managers, and funds based on their recent strong performance. The fear of “missing out on great returns” has likely driven more poor investment decisions than any other single factor.

If a specific asset class, strategy, or fund has performed exceptionally well over the past three or four years, one thing is certain: we should have invested in it three or four years ago. However, the cycle that led to this impressive performance may be coming to an end. Smart money is moving out, while less informed investors are pouring in.

Skipping Rebalancing

Rebalancing involves adjusting your investment portfolio to align it with its original asset allocation. This process can be challenging because it may require selling high-performing assets and buying those that are underperforming, which can be uncomfortable for many new investors.

However, allowing your portfolio to drift with the market can lead to problems. You’ll end up with too many overheated assets during market highs and too little in undervalued ones during lows: a recipe for weak long-term results. You can stay on track and enhance your long-term returns by committing to regular rebalancing.

Ignoring Stop-Loss Orders

Not using stop-loss orders is a major sign of a missing or weak trading plan. Stop-loss orders automatically sell a security when it hits a certain price, helping to limit your losses during sudden market downturns.

Setting tight stop-losses can keep losses small before they grow. However, in fast-moving markets or sudden crashes, orders might execute at worse-than-expected prices. Even so, the protection they offer usually outweighs this risk.

Another common mistake: cancelling a stop-loss on a losing trade because you “hope” the price will bounce back. This often leads to bigger losses. Stick to your stop-loss strategy and avoid emotional decisions.

Overtrading

One of the biggest mistakes traders make is trading too large a position size. Oversized trades amplify emotions, cloud decision-making, and can lead to devastating losses. If a single trade uses too much of your capital, a loss could seriously impact your finances or even your trading career. Smart traders manage risk by keeping position sizes small, ensuring no one trade can cause major damage.

Bottom Line

If you have the capital to invest and can steer clear of these beginner mistakes, your trading journey can be more rewarding, bringing you closer to your financial goals. With a trusted broker like VT Markets by your side, equipped with smart tools and market insights, you’re better positioned to trade with confidence and clarity.