Common Trading Mistakes
Frequent pitfalls new traders run into and how to avoid them.
⏱️ ~7 min read
Key Takeaways
- Common mistakes include trading without a plan, risking too much per trade, and letting losses run while cutting winners short
- Overtrading — making more trades than a strategy calls for — can erode returns through costs and impulsive decisions
- Chasing recent performance (buying what's already risen sharply) is a frequently cited behavioral pitfall
- Many mistakes are behavioral in nature, which is why trading psychology (covered separately) is closely related to this topic
Trading without a plan
A frequently cited mistake is entering trades without having defined, in advance, the conditions for entry, the position size, the stop-loss level, and the target or exit criteria. Without this kind of plan, decisions tend to be made in the moment — often under the influence of the emotions discussed in the Trading Psychology lesson — which can lead to inconsistent application of whatever strategy was originally intended.
Risking too much on individual trades
As covered in the Risk Management and Position Sizing lessons, risking too large a percentage of an account on individual trades means that even a strategy with a positive long-run average can experience a sequence of losses large enough to severely deplete an account before that average plays out. New traders sometimes underestimate how a string of losses — which can occur even with a sound strategy, simply due to variance — interacts with oversized position risk.
Example: How oversized risk compounds losses
A trader risks 10% of their account on each trade (well above commonly cited guidelines).
After five consecutive losing trades — which can happen even with a strategy that's profitable on average over a larger sample — the account has lost roughly 41% of its starting value (since each 10% loss applies to a progressively smaller base: 0.9^5 ≈ 0.59).
Recovering from a 41% loss requires a gain of roughly 69% just to return to the starting balance — illustrating why the size of losses, not just their frequency, matters enormously.
Cutting winners short and letting losers run
This describes a common pattern where traders exit profitable positions quickly (to 'lock in' gains, often driven by fear that the gain might disappear) while holding onto losing positions longer than originally planned (hoping they'll recover, often driven by reluctance to realize a loss). Over time, this pattern — small wins, large losses — can result in a strategy that's net unprofitable even if it produces more winning trades than losing ones, because the average loss outweighs the average win.
Overtrading
Overtrading refers to making more trades than a given strategy actually calls for — sometimes driven by boredom, a desire to 'stay active,' or attempting to quickly recover from a previous loss ('revenge trading,' covered further in Trading Psychology). Beyond the direct costs of additional trades (covered in the Day Trading lesson), overtrading often means deviating from a tested strategy into impulsive decisions that haven't been evaluated.
Chasing performance
Buying a security primarily because its price has risen sharply recently — without independent analysis of whether that's likely to continue — is a frequently cited behavioral pitfall. This can lead to entering positions after a significant move has already occurred, with less favorable risk/reward than if the position had been considered earlier (or not at all, if the move was already largely complete).
Not accounting for costs and taxes
Particularly for more frequent trading styles, failing to account for transaction costs, bid-ask spreads, and the tax treatment of short-term gains (generally taxed as ordinary income in the U.S. for positions held a year or less) can mean a strategy that appears profitable on a 'gross' basis is considerably less so — or not profitable at all — after these factors are included.
Frequently Asked Questions
Is it normal to make some of these mistakes when starting out?+
These are widely described as common pitfalls precisely because many traders — including experienced ones at times — encounter them. Awareness of these patterns, and building a plan that addresses them directly (e.g., predetermined position sizing and stop-losses), is often described as more useful than expecting to avoid them entirely through willpower alone.
How can I avoid 'cutting winners short and letting losers run'?+
Many traders address this by defining exit criteria (both for profits and losses) before entering a trade, and committing to follow those criteria regardless of how the position has performed so far — reducing the role of in-the-moment emotional decisions.
Does 'overtrading' only apply to day trading?+
No — overtrading can occur in any style, including longer-term approaches, if a trader makes more changes to their portfolio than their stated strategy calls for, often driven by short-term news or price movements rather than the original plan.