Trading without a clear strategy

​Many traders enter positions without a defined strategy, essentially gambling rather than trading with purpose. This approach often leads to inconsistent results and significant losses.

​A robust trading strategy should include clear entry and exit points, position sizing rules, and risk management parameters. It should be thoroughly tested and refined in a demo account before being used with real money.ng without a clear strategy

Emotional trading decisions

​Trading psychology plays a crucial role in success, yet many traders let emotions drive their decisions rather than following their strategy.

​Fear and greed are particularly dangerous emotions that can lead to premature exits from profitable trades or holding losing positions too long.

​The solution is to stick to your pre-planned strategy and avoid making impulsive decisions based on market noise or short-term volatility. Trading via a laptop or tablet rather than on a phone’s trading app might therefore be a better approach for many, especially traders who are starting out.

Overtrading and overleverage

​Many traders feel compelled to always be in the market, leading to overtrading and unnecessary commission costs.

CFD trading can amplify this problem through leverage, potentially magnifying losses as well as gains.

​Sometimes the best trade is no trade at all. Quality trading opportunities should be waited for rather than forced. This is true in the animal world as well: the cheetah, the fastest land animal in the world, doesn’t hunt each animal it encounters but waits for the best opportunity for a kill by focusing on young, vulnerable and old prey. It does so despite being capable of reaching speeds of up to 70 miles per hour (112 kilometres per hour).

How to avoid these trading mistakes

1. ​Develop and test a clear trading strategy before risking real money
2. ​Implement strict risk management rules and stick to them
3. ​Keep a trading journal to track and learn from your decisions
4. ​Use appropriate position sizing and avoid overleverage
5. ​Stay informed about market conditions and events

​These common trading mistakes can be particularly costly in today’s markets, where volatility remains elevated and many global stock indices are trading in record highs. By being aware of these pitfalls and taking steps to avoid them, traders can improve their chances of success in 2025.

Key Takeaways

• Behavioral finance argues that real people do not behave like the rational actors predicted by mainstream economic theories and the efficient markets hypothesis.
• Traders and investors tend to suffer from overconfidence, regret, attention deficits, and trend chasing, each of which can lead to suboptimal decisions and reduce returns.
• Here, we describe four common behavioral biases and provide practical advice for avoiding these mistakes.

Overconfidence

Overconfidence has two components: overconfidence in the quality of your information, and your ability to act on said information at the right time for maximum gain. Studies show that overconfident traders trade more frequently and fail to appropriately diversify their portfolios.1

A classic study analyzed trades from 10,000 clients at a large discount brokerage firm to determine whether frequent trading leads to higher returns. After removing tax-loss trades and others to meet liquidity needs, the study found that the purchased stocks underperformed the sold stocks by 5% over one year and 8.6% over two years. In other words, the more active the retail investor, the less money they make.2.

Regret

You were confident that a particular stock was value-priced and had minimal downside potential. You put the trade on, but it worked against you. Still feeling like you were right, you didn’t sell when the loss was small. You let it go because no loss is a loss as long as you don’t sell the position. It continued to go against you, but you didn’t sell until the stock lost a majority of its value.

As humans, we try to avoid the feeling of regret as much as possible, and often we will go to great lengths, sometimes illogical lengths, to avoid having to own the feeling of regret. By not selling the position and locking in a loss, a trader doesn’t have to deal with regret. Research shows that traders were 1.5 to 2 times more likely to sell a winning position too early and a losing position too late, all to avoid the regret of losing gains or losing the original cost basis.45

How To Avoid This Bias 

Set trading rules that never change. For example, if a stock trade loses a certain percentage of its value, exit the position. If the stock rises above a certain level, set a trailing stop that will lock in gains if the trade loses a certain amount of gains. Make these levels unbreakable rules and don’t trade on emotion

The Bottom Line

Do you see a bit of yourself in any of these biases? If you do, understand that the best way to avoid the pitfalls of human emotion is to have trading rules. Those might include selling if a stock drops more than a certain percentage, not buying a stock after it rises a certain percentage, and not selling a position until a certain amount of time has elapsed. You can’t avoid all behavioral biases, but you can minimize the effect on your trading activities.