All investors – new, experienced, it makes no difference – are inevitably going to make mistakes when they trade.
Mistakes are an inevitable part of the learning process but are only going to hurt you in the long run if you don’t learn what went wrong, to begin with, and how to avoid those same mistakes moving forward.
Below we highlight seven of the most common mistakes people make with price action trading, mistakes that can tank your profits faster than you expect – but mistakes that are (reasonably) easy to avoid when you know what to do.
Let’s jump right in!
Generalized Readings of Pin Bar Formations
One of the largest mistakes people make (particularly in the Forex world with price action) is assuming that pin bars begin to form up for the exact same reason. But nothing could be further from the truth.
Don’t get sucked into the mistake of believing that every pin bar has the potential to cause the market to reverse completely. That’s just not the way the market works. By all means pay attention to pin bar indicators, but don’t allow them to be the weathervane of your trades.
Leaning Hard on Indicators
Indicators of all kinds can certainly help you get a clearer picture of what’s going on with a specific security or asset, but “trading the indicators” is almost never a wise idea.
It’s a much better idea to analyze timeframe data so that you have a more holistic picture of what’s happening in the market. Hunt for trades based on proper logic rather than trying to “spot the indicator” every time you want to execute in the market.
Hoping a New Higher High (or Lower Low) Means a Continuation of Reversal of Trends
This common mistake has been pushed in a big part by the “Dow Theory”, which may be helpful with more traditional markets and trading strategies but really doesn’t have all that much of a bearing on price action investing.
If you’re going to use this kind of indicator make sure that you wait until the market has really broken through the previous support or resistance. Early generalities aren’t going to help you all that much.
Steering Clear of Lower Time Frames
Price action trading can be extremely profitable, but the lower timeframe trading strategies are really only going to help those that are willing to throw caution to the wind more often than not and be really (REALLY) aggressive.
Don’t be shy about stretching out your timeframe for trading a little bit to avoid those kinds of super high-risk plays. You’ll still want to move quickly in the markets, but you don’t want to get sucked into deals that could tank your portfolio just because the action looks hot in the short term.
Constantly Trading with the Long Term Trends
At the same time, it’s never a good idea to constantly be trading in the direction of the long-term trend just because that’s what feels like it should make the most sense.
This is a mistake that a lot of price action traders make – especially when they are new, but particularly when the getting is good (as they say).
The market is (inevitably) going to move against the long-term trend at some point in time and you don’t want to be the only one playing musical chairs without a seat to sit on when the music stops.
Ride momentum while it is still being generated, pull out before the waves start to crash, and then readjust, realign, and move forward with the new momentum.
Ignoring the News
More often than not (especially in the price action trading world) it’s going to be the daily news that makes the most impact on the market than traditional indicators or technical data.
Even though price action trading as a system is heavily influenced by the Japanese Candlestick Pattern theory (and built on top of legitimate fundamental analysis), the news – how it breaks, when it breaks, and what the market reacts to – is hugely important.
Make sure that you have your ear to the ground for sure.
Pile on the Risk
Every investor knows that they are (inevitably) going to lose some trades.
That’s just the nature of the game. Nobody bats .1000 in the world of investing.
At the same time, it’s important that you minimize your risk as much as possible while learning to embrace the fact that losing trades are going to happen no matter what.
Do everything you can to build a strategy that helps you win more than you lose, capitalize on positions that do not expose you to unnecessary risk, and build your wealth through price action trading without taking on piles of risk that could wipe you out in one move.