Trading Mistakes to Avoid – Distracted by News

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Retail traders often get burnt trying to trade the news. They spend lots of time and energy finding, researching and analyzing news stories related to the overall market or a specific sector or stock, and then place trades based on their analysis and determination. More often than not, they end up on the wrong side of the trade, even when their analysis was spot on. Just to be clear, there are definitely some retail traders that excel at trading the news. The overwhelming majority don’t.

Why is trading news a bad idea for most less experienced retail traders?

Let’s dive in and take a deeper look.

There are roughly two types of news. There’s news that is anticipated and news that is a surprise.

Anticipated News

Some examples of anticipated news are:

  • The Fed is expected to raise rates by a quarter point at the next Fed meeting, which should mean lower prices for stocks.
  • Congress is expected to pass a law legalizing marijuana.
  • A state is expected to legalize sports betting.

In each of these example, the news is anticipated months ahead of the actual event, allowing traders to plan and prepare.

The problem with trying to trade anticipated events is that when they finally come to fruition, the market reaction is usually the opposite of what logic would dictate it should be. The Wall Street adage goes like this: “Buy the rumor, sell the news.”

For example, the Federal Reserve often signals its intentions regarding interest rate hikes or cuts well in advance. In 2018, the Fed signaled multiple rate hikes throughout the year. Markets reacted ahead of each official announcement, with sectors like financials rising in anticipation of higher rates. However, when the actual rate hikes were announced, the markets often sold off. Why? The hikes had already been priced in during the months of speculation, and traders used the official announcement as an opportunity to take profits.

For another example, assume that Congress is scheduled to vote on legalizing marijuana and your considering buying pot related stocks with the assumption that they will surge higher when the law is passed. By the time you’ve heard this news, the smart money has already been accumulating these pot related securities for some time, which is why you’ve noticed the prices rising. But the vote is still a month a way, so even though the stocks have moved a significant amount, you figure that there’s still time to buy in ahead of the vote. So you buy the pot ETF MJ, up 15% on the month, planning to hold it to take advantage of the anticipated pop when the bill is passed. The day of the vote arrives and your sitting at your desk glued to your screen, ready to watch MJ, and your account, hit new highs. The news flashes across your screen: Congress Passes Pot Legalization Bill. Woohoo!! The stock does a quick wick up and then, just as quickly starts selling off with a vengeance. Sell the news strikes again…and your position is deep red and bleeding off.

What happened in this scenario is that smart money priced in the law passing several months before the actual vote, and accumulated the stock over that time, steadily driving up the price. As the date of the vote got closer, retail traders finally got the news and started piling in and driving the prices even higher. While retail was FOMO buying, the smart money was selling to them, as they began to unwind their position and take profits. When the vote finally passed, retail traders got super excited and started to buy, which cause the stock to momentarily spike, at which point the smart money took the opportunity to pull the rug out and start a wave of massive selling on huge volume. Understand that these smart traders bought their securities months earlier and huge discounts and were now selling and booking giant profits. Wouldn’t you do the same?

The only way you can trade anticipated news is to get into sync with the smart money, and the way to do that it to closely monitor the volume behind price moves (as discussed in Chapter XX). In most cases you’ll be buying the rumor ahead of the anticipated event and selling the news after the event has taken place.

The exception for this playbook is in cases where the anticipated outcome does not materialize and the smart money gets caught on the wrong side of the trade. For instance, say the smart money consensus is that the state legislature is not going to pass a bill legalizing sports betting and therefore, institutions have been selling off some of the relevant gambling stocks. Then the legislature passes the bill taking everyone by surprise. Now the smart money needs to reverse course and starts piling into the gambling stocks, gapping them up and pushing them even higher on heavy volume.

Another example of this is in 2016, when many investors assumed Hillary Clinton would win the U.S. presidential election. Stocks like renewable energy companies rallied on this assumption, while coal and oil stocks were sold off. When Donald Trump won, the consensus was overturned. Coal and oil stocks spiked, while renewable energy stocks took a hit, reflecting the sudden shift in expected policies.

That’s right, the smart money gets it wrong sometimes too.

Surprise News

The surprise kind of news happens without warning. Here are some examples:

  • A war unexpectedly breaks out in the Middle East.
  • A storm damages several oil rigs.
  • A company releases unexpected guidance.
  • Fraud is uncovered in a major, publicly traded company.
  • A bank reveals that it is insolvent.

All of these examples are news events that take the market by surprise and could trigger significant market or stock price moves. The tricky thing about surprise news is that what might come as a surprise to you, is unusually already old news for the smart money.

How can that be?

Simple. The smart money has unlimited funds to buy faster access to information, better networks, and sophisticated algorithms that scour news sources and social media for any hint of market-moving events. Institutional traders may even get early warnings through industry connections or proprietary data feeds that aren’t available to retail traders.

I personally follow options flow and I can’t tell you how many times massive call or put buying comes in the day before a “surprise” piece of news is released, verifying the options bets. Is it illegal insider trading? Who knows and who cares. The only thing that should concern you is the knowledge that the smart money has information that you don’t, and can and will act on it before you even hear about it. By the time you see the news flash on your screen, the smart money has likely already reacted, and the price has adjusted to reflect their actions.

For example, the sudden collapse of Silicon Valley Bank caught many retail investors by surprise. However, large institutional players reacted quickly to reports of the bank’s liquidity issues, which surfaced before the official announcement. When the news broke, the smart money had already positioned themselves, shorting the bank’s stock or rotating into safer assets.

There are also cases where news stories or rumors will hit the wire and cause a steep market reaction only to be proven as false moments later. Many of these fake stories could very well be generated by smart money traders looking to exit or enter positions. In other words, they’re looking to trigger retail FOMO and get traders to chase a fake story backed by an initial, smart money generated, price spike. Once FOMO hyped traders start buying (or selling) into the spike hoping for continuation, the smart money takes the other side of the trade, causing the price to reverse as quickly as it spikes and leaving stunned horde of red bag holders.

A classic case of fake news influencing markets occurred in 2013, when the Associated Press Twitter account was hacked. The hackers posted a false tweet claiming there had been explosions at the White House, causing the Dow Jones Industrial Average to drop nearly 150 points within minutes. Smart money algorithms were quick to capitalize on the panic, selling at the top of the initial spike and buying back in as the market corrected once the news was debunked.

Bottom Line

Trading the news is a game where the odds are stacked against retail traders. While there are exceptions, most news events are already priced in or are frontrun by smart money. By the time you hear the news, you’re already late. The smart money has already acted on it. Getting in late to the game will most likely leave you buying at the top or selling at the bottom.

Instead of jumping in on news, wait for the market to stabilize and confirm the direction before making a move. Just remember that the smart money is likely already several steps ahead, so unless you’re sure you can trade in sync with them, better to sit on the sidelines, same your money and wait for the type of setups you know you have a good chance of winning.

 

Trading Mistakes to Avoid – Ignoring Volume

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We already touched on this point in the previous chapter about following the smart money, but it’s arguably the most important factor in trading in harmony with the smart money, so it’s worth while reinforcing and expanding upon.

Price moves on heavy volume indicate smart money activity. If you are trying to follow the smart money, as you should be, then volume is your primary guide and informant. Retail traders simply don’t generate the type of huge volume bars you often see behind big price moves. Only institutions and hedge funds have the fire power to push prices, and when they do, it’s clearly indicated in the volume bars you see on your stock charts. I’m not referring to cheap, illiquid, low flow stocks, or occasional meme stock outliers like Gamestop, where retail traders could have a short term effect on pricing. I am referring to highly liquid stocks that trade millions of shares daily. These stocks can only be moved by heavy, institutional volume.

Watching the volume will help you identify stocks to buy and sell, and keep you from getting faked out of your positions on temporary pops or drops in price.

Take Apple (AAPL), for example, one of the most widely traded and liquid stocks on the market. Let’s say you see it break out of a consolidation zone above a resistance level, but the breakout happens on below average volume. That’s a red flag. Without significant institutional participation the move is likely to fail, and you could find yourself chasing a false breakout. On the other hand, if AAPL breaks out on a volume surge two or three times the daily average, that’s a strong indicator that the smart money is behind the move. Institutions don’t just dabble; when they commit, it’s clear in the volume. This is when you want to go along with the momentum and ride the wave.

Let’s look at Tesla (TSLA), a notoriously volatile stock. Imagine TSLA is experiencing a significant pullback after a sharp run-up. You see price testing a key support level, such as the 200-day moving average, but the volume during the pullback is light. This could indicate a lack of conviction from sellers, signaling that the pullback might just be a brief pause before a  continuation higher. However, if the price drop to the 200 is on high volume and breaks through, it’s more likely that the smart money is unloading their positions, and you’d want to avoid—or short—the stock.

Volume can also help you avoid getting faked out during sudden spikes or drops. Consider Nvidia (NVDA), a favorite among traders. If the stock suddenly spikes 3% on news but does so with minimal volume, it’s likely a short-term retail-driven reaction. Jumping in could leave you holding the bag as the price retraces just as quickly. Conversely, if the spike happens on a volume surge well above the average, it’s more likely that institutions are driving the move, and there could be follow-through in the days ahead.

It’s not just about spotting entries either. Watching volume can help confirm when it’s time to exit. Imagine you’re holding Meta (META), and it’s been climbing steadily for weeks. One day, it gaps higher on unusually light volume in the premarket, and then during the regular trading session, it starts selling off with significantly higher volume than usual. That’s often a signal that institutional sellers are stepping in, and the stock could be topping out. Exiting at that point can help you lock in profits before a potential downturn.

Volume can also help you avoid getting faked out during sudden spikes or drops. Say NVDA suddenly spikes 3% on news, but does so with minimal volume – it’s likely a short-term retail-driven reaction. Jumping in could leave you holding the bag as the price retraces just as quickly. Conversely, if the spike happens on a volume surge well above the average, it’s more likely that institutions are driving the move, and there could be follow-through in the days ahead.

A pop on low volume is a sign to wait and see, not to jump in. The pop could be retail traders driven by FOMO wanting to get in on action. The smart money could also be pushing the price higher to trigger retail FOMO and create the liquidity they need to start exiting their positions and collecting their profits.

Bottom Line

The key takeaway is that volume gives context to price. Price alone doesn’t tell the whole story. High-volume moves are the footprints of the smart money, and by paying close attention to those footprints, you can make better trading decisions. Ignoring volume, on the other hand, is like trying to drive wearing a blindfold. You’re bound to crash, sooner or later.

Trading Mistakes to Avoid – Holding Losers

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We’ve already discussed how taking profits too soon can drain your account, despite the adage that “you can’t go broke taking a profit”. The reason why you CAN go broke taking a profit is because you are holding your losers longer than your winners. No matter how many trades you win, if your losers outweigh your winners, your account will slowly bleed out. If you’re not doing this then go ahead and skip this chapter. Ninety five percent of all traders, even some very experienced ones, do hold their losers too long.

Why does this happen?

It’s a psychological issue as much as a technical one. Taking profits feels good. It gives you an instant sense of accomplishment, a confirmation that you were “right.” Your instinct is to lock in those profits so that you don’t lose them in case the price moves against you, which often results in  leaving significant gains on the table. On the other hand, closing a losing trade is painful. It forces you to confront the fact that you made a mistake. So, instead of cutting losses quickly and keeping them small, many traders hold on, hoping for a reversal that will bail them out. Everyone would rather notch a win than a loss.

Sometimes you might see valid reasons for holding on to a losing trade. For instance, you might have bought XYZ while it was moving steadily higher above the 8 day moving average, betting on continuation, and you want to use the 21 day moving average as your stop out level. XYZ breaks below the 8 day and then makes a quick move down to the 21 (the timeframe is irrelevant). Your plan was to get out if it break the 21, but you notice that the 34 day MA is not too far below the 21, so you decide to give it a bit more room to see if the 34 will hold. As it approaches the 34 you notice that VWAP is right below the 34, and the 89 is a bit beneath VWAP. You’ve got all of those significant levels that can potentially act as support, so you decide to hold down to the 89 to give your original trade thesis more of a chance to work. XYZ ends up picking up steam and plunging  through the 34, VWAP and the 89.

While you definitely had some valid technical reasons for deciding to hold XYZ longer than you originally planned, the end result is that you held onto a losing trade too long. What would have been a small loss had you sold on the break of the 21, turned into a painful loss when you got out on the break of the 89. Of course, if you stubbornly end up hanging on past the 89, your account could take a substantial hit. If you keep doing this repeatedly, you’ll end up blowing up over time, especially if you also cut your winners quickly.

The tricky part of the XYZ example is that there are lots of additional factors (such as volume, news, options flow etc) that can give you reason to hold on to the losing trade longer than you originally planned, and by doing so, you might end up proving your original trade thesis and produce a juicy green trade. If you’re a newer, less experienced, trader, you are probably better off sticking to your initial trading plan and cutting your loses quickly. You can always get back in at a lower price later. But for the time being, you’ve avoided a big loss and, if the stock reverses right after you sell, you can either get back in or just move on to a different ticker.

Correcting the Problem

The key to overcoming the problem of holding on to losers is to prioritize discipline over hope (otherwise known as hopeium). Accept that not every trade will work out, and that’s okay. Nobody knows what the market will do in the next tick, so every trade you place is in essence a gamble. Your goal isn’t to win every time. It’s to keep losses manageable so that your winners can more than make up for them.

Start by creating clear rules before you enter any trade. Decide exactly where you’ll cut your loss if the trade doesn’t work and where you’ll take profit if it does. These levels should be based on technicals, not arbitrary numbers or emotions. The real challenge is then sticking to these levels once the trade is live.

What makes this hard? Fear and greed.

Fear convinces you to close winners too soon, and greed keeps you holding onto losers longer than you should. The solution is to remove emotions from the process entirely. Set your stops and sell targets, either mentally or in your trading platform, and respect them religiously, regardless of how you are feeling in the moment. When your stop hits, you’re out—no second-guessing.

What you do not want to do is start moving your stop further away when a trade goes against you. Doing so, in most cases, will just delay the inevitable and result in a bigger loss. If your original thesis was wrong, accept it, take the hit, and move on. You can always re-enter later if the setup improves.

Finally, evaluate your trades regularly. Look for patterns in your behavior, especially when it comes to managing losers. Are you hesitating to cut losses because you think the price will reverse? Are you justifying holding on because of unrelated factors? Identifying these tendencies is the first step to eliminating them.

The bottom line

Discipline is your best weapon as a trader. Cut losers quickly, let winners run, and stick to the plan. It might not always feel good in the moment, but the green color of your account will be all you need to feel good about your trading going forward.

Trading Mistakes to Avoid – Not Understanding How the Market Really Works

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One of the biggest mistakes traders make is believing the market moves based on news, fundamentals, or some logical reaction to external events. Good news sends stocks up, bad news sends them down. An earnings beat will lift a stock and a miss will tank it. It seems obvious, right? Not exactly. The truth is far more complex—and failing to understand this is why so many traders consistently lose money.

The reality is that markets don’t move because of what’s happening in the world. They move because of what the smart money is doing. And if you don’t understand how the smart money operates, you’re setting yourself up to become their liquidity—the fuel that feeds their profits.

How the Market Really Works

Let’s start with the basics: the majority of trading volume comes from institutions, hedge funds, market makers, and other professional traders managing billions of dollars — the Smart Money. Retail traders like you and me make up a tiny fraction of the market volume.

The smart money is…well…smart! They have the smartest minds money can buy crunching numbers, analyzing data and programming killer trading algos. They also have the best and freshest information that money can buy, and they get their data and news before dumb money traders like us. They accumulate positions when prices are low and sell when prices are high. But they don’t simply wait for prices to hit their desired levels. They have the funds to actually create the opportunities to buy low and sell high. When the smart money billions move, the market moves.

Here’s the Smart Money playbook:

1. Accumulate at Low Prices

The smart money wants prices to be cheap before they start buying in bulk. To get there, they might:

• Let demand dry up and watch the price fall.

• Short the stock to drive prices lower.

• Use negative news or rumors to spark panic selling.

This is why markets often drop on “bad news” that doesn’t seem all that significant. The news isn’t the real driver; it’s the excuse the smart money needs to bring prices down.

During this phase, you’ll often see hammer candlesticks on the chart—where prices recover sharply after a deep sell-off, accompanied by heavy volume. These hammers show the smart money stepping in to stop the decline and start accumulating.

For example, just recently the market was trading at its highs for several ways and moving even higher on relatively low volume. Suddenly, a news story broke about Russian President Putin insinuating that he might use nuclear weapons in the Ukraine war, and the market quickly began to plunge. The indexes came down a percentage point or so, and then quickly recovered and moved even higher.

Was that news story really the fundamental driver for the quick market plunge? If the world was really afraid of Putin using nuclear weapons, would the markets recover in the span of an hour or 2 and continue to move higher? Unlikely.

The more plausible explanation is that the smart money wanted to buy stocks, but not at full retail prices. They only buy at deep discounts, so they used the Putin story to trigger a sell off and generate some panic selling, primarily by retail traders, to drive the prices down. When the prices were low enough, the big volume bought the dip, on the cheap, and ride the market back up for a tidy profit.

2.Test the Market

After accumulating, the smart money may push prices up slightly to see if sellers are still waiting. This is called a low-volume retest. If there’s little resistance, they’ll start driving the price higher.

For example, let’s say stock ABC hits a major resistance level at 100 and then starts to sell off on heavy volume and reaches a support level at 80. The selloff could have been triggered by a change in fundamentals, a news headline or a general market move. The reason for the move doesn’t really matter. The only thing that matters to traders is that the smart money has decided to sell the stock and reap their profits, and has also probably decided to short the stock.  But in order to sell stock in the kind of volume that the smart money does, they need to have buyers.

Once the stock price has hit 80 and sellers have been exhausted, the smart money can either start covering some of their short positions and take their quick 20 percent profit (100 to 80) or they can push the price higher and then short it again. So they do a little short covering and start buying a little to create the impression that the stock is starting to reverse and rebound. Coincidentally, a positive news headline might come out or perhaps a rumor about a merger or takeover.

Suddenly, the stock price starts moving higher and retail traders following the stock, thinking that the worst is over start buying in the high 80s. Before you know it the stock is back to 90. However, the move up has been on low volume — a combination of smart money tease buying and retail FOMO. Don’t forget, the smart money has no problem buying tens of thousands of shares to get retail buyers excited about the stock move.

At 90 the smart money decides that it’s time to continue their original plan. As retail buyers continue to pile into the stock as it pushes higher, the smart money gets busy selling the shares they bought back at 80, making another nice profit, and adding to their short positions. As the stock starts to push lower, retail traders either get stopped out or scared out of their long positions, causing the selling pressure, and volume, to increase. Now the stock drops breaks through the 80 support on heavy volume and continues lower.

Here’s the final recap: Smart money sold at 100, bought back at 80 and sold again at 90, making nice profits. Retail traders bought in the high 80’s through 90 and sold at a loss. [The only way to avoid this retail trap is to watch the volume behind a move.]

3.Distribute at High Prices

When the smart money accumulates enough stock, the price pushing higher. This could take a while, with a slow and steady price bumps, or it could happen over a day or 2, with a big surge. When retail traders see the price surging they pile in, driven by FOMO. This is exactly when the smart money quietly sells into this enthusiasm, locking in their profits.

By the time the market feels euphoric, the smart money has completed their selling. When retail traders are buying at the top, the smart money is preparing to drive the prices back down to begin another money making cycle.

Most retail traders get it wrong because they assume markets move logically based on external factors like earnings reports, news, or economic data. But these are only secondary causes. The real driver of price action is supply and demand created by the smart money.

This misunderstanding leads to common mistakes like chasing breakouts that turn out to be fake and panic selling during sharp drops engineered by institutions to buy cheaply. Retail traders let their emotions, like greed and fear, direct their trading, playing right into the hands of the smart money.

Another favorite smart money tactic is stop hunting. They know retail traders place stop-loss orders just below support or above resistance. By pushing prices slightly beyond these levels, they trigger those stops, forcing traders out of their positions. This shakeout creates the liquidity needed for smart money to enter or exit positions, and to reverse the price in the opposite direction. Retail traders, meanwhile, are left confused and frustrated as the market reverses right after they’ve exited.

Most retail traders are doing the exact opposite of what they should be doing. When prices are surging and the volume starts to decrease, they are allowing their FOMO to make them chase and buy at the highs. When prices are plunging and hitting lows, they are selling into the panic just as the drop is losing steam and preparing to reverse. Retail traders are basically trading against the smart money instead of with it, and are getting skinned and gutted in the process.

Align Yourself with the Smart Money

To trade successfully, you need to think like the smart money and align your strategies with theirs. The goal isn’t to outsmart them—that’s nearly impossible given their vast resources and influence—but to recognize their patterns and position yourself accordingly.

Accumulation and distribution phases are key aspects of how the smart money operates. During accumulation, they quietly buy stock at low prices, often in tight ranges accompanied by heavy volume. Indicators like hammer candlesticks or unusual options activity can reveal their presence. Conversely, during distribution, the smart money offloads stock at higher prices while retail traders pile in, driven by euphoria.

Price action and volume are essential tools for identifying the movements of the smart money. Price action tells the story of market behavior, while volume reveals the intensity behind that story. A price breakout or breakdown without significant volume is often a trap, designed to lure retail traders into impulsive decisions. The smart money operates in large size — their moves tend to come with substantial volume. When volume confirms a price move, it’s far more likely to be a genuine smart money play. Paying attention to the volume on price moves can help you identify smart money movements and enter trades when the smart money is buying and exit before they start selling.

Even if you do correctly read the volume on a move, patience is key. The smart money often waits for a retest of a significant level before fully committing to a direction. These retests, where former resistance becomes support (or vice versa), are opportunities for traders to enter with reduced risk. Also, placing stop orders further away from the “obvious” levels will help you avoid being a victim of smart money stop hunting.

Bottom Line

Perhaps the most challenging aspect of aligning with the smart money is mastering your emotions. Fear and greed are the weapons the smart money wields against retail traders. They profit when traders panic or chase trades out of FOMO (fear of missing out). When markets are euphoric and prices are surging, it’s often a sign that the smart money is selling. Conversely, when fear dominates and prices are plummeting, the smart money is usually buying. Remember Rothschild’s famous advice: “Buy when there’s blood in the streets.” To succeed, you must resist emotional impulses, trust your analysis, and act when others hesitate.

Trading is not about outmaneuvering the smart money—it’s about recognizing their strategies and following their lead. By carefully observing price action, volume, and sentiment, you can learn to identify when and where the smart money is active. The smart money leaves clues for those who pay attention, and success lies in aligning your trades with the winners instead of fighting against them. Failing to heed those clues will keep causing you to be on the wrong side of trades.

Don’t fight the smart money. Trade along with them, and you’ll give yourself a much better chance of success.

Trading Mistakes to Avoid – Fighting the Trend

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Stocks, and markets, can either be trending, volatile, choppy or flat. Volatility is what makes traders salivate, if they can take advantage and be on the right side of the extreme moves, both up and down. Choppy days, when the price action remains in a small, tight range, can wreak havoc on an account, by triggering false signals and leading to overtrading (see chapter XX). Flat price action don’t lend itself to trading at all. Each of these conditions presents its own challenges, but trending days stand out because they demand a great deal of patience to trade.

When a stock is trending, there’s usually a reason for it. the way to trade a trend is to take a position and hold it as long as the trend lets you. As the saying goes, “the trend is your friend.” The last thing you want to do is to trade against it, unless you have a very compelling reason to do so. Many traders will look for a trend to stall, hoping to catch a reversal to the mean, or more.

Cautious traders will wait for confirmation of a trend reversal, be it a candlestick formation, a break of a moving average or a bounce off of a support or resistance level before taking a position. Aggressive traders will try to anticipate a reversal by taking a position before a move has occurred. If done at the right time and place on the chart, an experienced trader can appropriately manage their risk and place their stop close to the area they believe will act as support or resistance. Many newer traders who try to anticipate moves end up entering their trades without taking into account appropriate stop loss area and end up getting hurt.

In either case, trying to catch a trend reversal without confirmation can end in multiple failures and significantly chip away at your account, even with good risk management. Trends eventually reverse, but how long it might take to do so is an unknown. Trying to anticipate the reversal is like trying to step in front of a moving train, again and again. If the trend is strong, it will run you over every time.

Fighting the trend not only drains your account but also takes a mental toll. It’s frustrating to enter a short position only to watch the stock climb higher—or to buy into a potential bottom only to see it keep falling.

Bottom Line

Catching reversals is a wonderful trading strategy and can be extremely profitable. The problem is when you try to anticipate reversals in a strong trend and repeatedly fail. Even with the best risk management, continues losses will still take their toll and might even discourage from continuing to trade and cause you to miss the reversal when it eventually does come. The safest way to trade against a trend is to wait for confirmation of the break. In most cases, there will still be plenty of room in the reversal to profit from, even if you miss the initial trend break. On the bright side, you’ll avoid lots of painful losses and frustration.

 

Trading Mistakes to Avoid – Too Heavy

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You’ve found the setup of your dreams. All of your technical indicators, or whatever you use to make trade decisions, are telling you that this stock is going higher. You want to cash in big time because, for all you know, this could be the last time you have a chance at such a juicy trade that will almost definitely push your account to the next level. You usually risk about 1% of your account on a trade, which in this case would allow you to buy 3 calls or around 100 shares. But since this looks like such a sure thing, you buy 10 contracts along with 250 shares to really take advantage of the opportunity. When the stock “surprisingly” pulls back a couple of points, you buy another 5 contracts and 100 shares. Now you’re holding 15 contracts and 350 shares, way above your normal level, and your feeling pretty good about it.

You go to bed that night and have a bit of trouble falling asleep because you start getting a bit nervous…what happens if you got it wrong? You wake up a couple of hours earlier than usual and can’t fall back asleep because your mind is now scrolling through worst case scenarios. Your stomach starts doing summersaults. At this point, you start to realize that you went in too heavy and are sitting on way too much risk for your account size.

What happens next isn’t really that important for the lesson you need to learn from this scenario: if you’re losing sleep, breaking out into sweats, feeling nauseous, or constantly clenching your butt cheeks, you’ve gone into a position much too heavily — too many contracts or shares.

For the heck of it, let’s play through some possible outcomes:

  1. The stock gaps up overnight and you wake up to a hefty profit. Your outsized risk paid off and you take a victory lap. You hopefully take profits before the stock reverses and ends up red.
  2. The stock gaps down overnight, bypassing your stop, and leaving you drowning in a sea of red. Your account, and your trading confidence, is in shambles. Lesson learned.
  3. The stock doesn’t do much the next couple of days, your options contracts loss premium and you continue to lose a lot of sleep as you sweat and clench your way through managing the trade. Lesson learned, hopefully.

Going too heavy can also significantly hamper the way you manage your position in that, you might not be able to hold through pullbacks, because your unrealized losses are going to be too high. For example, I once had a much too heavy position in JPM calls, which I ended up closing for a loss when JPM had a 5 point pullback as part of an overall market drop. I was staring at a loss on the position that I simply couldn’t stomach. A couple of weeks later, the stock had made up the drop and risen another 7 points. Had I had a smaller position, I wouldn’t have felt pressure to see and would have ended up with a very healthy profit.

Taking on too much risk, or going too heavy, is one of the most common mistakes traders make. Besides the obvious financial hit that can wreck your account, it comes with serious psychological and emotional effects that can spill over into your life.

When you’re constantly stressed about the next trade or worried about a big loss, it can start to affect your sleep, your relationships, and even your sense of self-worth. The pressure to recover losses might drive you to take more risks, creating a vicious cycle. Over time, the anxiety can weigh heavily on you, making it harder to relax or enjoy life outside of trading. What starts as a financial issue can slowly chip away at your mental health, leaving you feeling drained, overwhelmed, and stuck in a constant state of worry.

For example, a trader might find themselves unable to focus on anything else because they’re obsessing over the next move in the market, ignoring family or social time. A bad trade might leave them questioning their abilities, leading to self-doubt that affects their confidence not just in trading, but in other areas of life too. In extreme cases, this stress can lead to burnout, where the trader feels mentally and physically exhausted, making it even harder to make clear decisions or stick to a strategy. The emotional toll can even cause traders to make reckless decisions, like staying in a losing position too long, trying to “make it back,” or overtrading to feel in control again, only to end up in a deeper hole.”

There’s clearly a lot more than money that you can lose by taking on too much risk. It’s a toxic combination of financial destruction, stress, anger, and loss of confidence that can ruin you. Most traders that blow up can probably attest to this.

Bottom Line

Be aware of your account size and appropriate risk parameters before getting into every trade. No matter how juicy the trade might seem, you don’t want to go too heavy and risk the consequences. Taking an appropriate amount of increased risk on a trade you identify as having a higher probability of success is a good thing. Going overboard on your risk and position size could destroy you, financially and emotionally.

Trading Mistakes to Avoid – Playing ERs

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Feel like hitting the casino and putting all your money on red or black? You might want to trade earnings releases instead and save yourself the flight.

Earnings releases (ERs) are super exciting—and dangerous—because of the opportunity to profit from a huge gap up, or down, while you sleep. The lure of quick profits from a big post-earnings move can be irresistible. But here’s the reality: playing ERs is more gambling than trading. Whether you’re trading stocks or options, the risks often outweigh the potential rewards because if you bet wrong, your account can take a significant hit.

Trading Stock

Trading stocks through ERs might seem like a straightforward play. Buy before the announcement, and if the company beats expectations, watch the stock soar. Easy, right? Wrong.

Most earnings announcements come after the market close and are often followed by gaps. That means the price jumps straight to a new level, leaving you no chance to manage your position. If it gaps in your favor, great! But if it gaps against you, you’re stuck holding a massive loss, without much recourse other than to bail and lick your wounds or wait until regular trading hours and hope for a reversal. Guessing which way an ER will go is a coin flip at best. Even the institutions get it wrong, but they’ve usually hedged their positions to manage their risk. You most likely haven’t.

Of course, if you’re holding for the long term, then a blown ER probably won’t matter as much, unless it destroys your fundament or technical trading thesis. But for a short term trade, you’re rolling the dice and playing with fire that you can’t manage.

An account crippling ER trading mistake I made was playing DELL earnings a while back. Similar companies in the sector where beating their numbers and surging, so i figured it was a sure thing to bet on DELL doing the same. I also liked the chart setup and I noticed some call flow ahead of the release. So I doubled my usual stock position size the day before ER. Needless to say, DELL disappointed and plunged around 15 points. The drop continued during regular trading hours and I sold on a break of a support level and booked a hefty loss, which made a material dent in my account. it didn’t put me out of business or even cripple me, but it did set me back financially and psychologically. On the bright side, it was an important lesson learned and a mistake I haven’t repeated since.

Trading Options

If trading stock ahead of earnings is like betting red or black, trading options ahead of ER is like placing the same bet with the dealer taking half your money regardless of the outcome. The reason for that is IV crush.

Leading up to earnings, the implied volatility (IV) on options spikes as the market makers, who are selling the options, anticipate big moves and increase options premiums to cover their outsized risk. That makes options super expensive right before earnings. After the earnings release, IV drops like a rock—often regardless of the direction the stock moves, sucking those hefty premiums right out of your options contracts. This phenomenon, known as the IV crush, can obliterate your option’s value even if the stock moves as you predicted.

Let’s use Netflix (NFLX) as an example—a stock notorious for its big post-earnings moves.

Imagine it’s the day before Netflix’s Q2 earnings report. The stock is trading at $400 and you’re bullish, expecting a blowout quarter. You buy one $410 call option expiring that Friday for $15 per contract, or $1,500. The stock technically needs to move above $425 ($410 strike price + $15 premium) for you to start making a profit. You’re feeling like it’s a sure thing.

Netflix releases its earnings after the market close. The numbers are good, and the stock jumps $20 to $420 in after-hours trading—just as you hoped. But when the market opens the next day you check your option and realize something strange: it’s worth just $8 now, or $800.

Wait—Netflix went up, so why are you losing money?

Here’s what happened:

Before earnings, market makers jacked up the option’s implied volatility (IV) to 80% in anticipation of a big move. That IV spike is what made the option so expensive, at $15. Once the earnings were announced, the uncertainty was gone, causing IV to drop to 40%, cutting the option’s premium in a big way. Even though the stock moved $20 in your favor, the drop in IV wiped out most of your option’s value.

To add to that, while a $20 move sounds big, it wasn’t big enough. Market makers had priced in an expected move of $25 (based on the inflated IV), so the actual $20 move was considered “underwhelming.” That left your $410 call deep in the red despite the stock’s rise.

If you’d bought Netflix stock instead of the option, your $20 gain per share would’ve made you a solid profit. But because you played the option, the IV crush left you with a loss—even though you were right about the direction.

This example shows how trading options ahead of earnings isn’t just about guessing the direction—it’s about overcoming the double whammy of expensive premiums and the IV crush. That’s why buying options prior to ER as a directional bet on the stock move stacks the odds heavily against you from the start and is strongly discouraged. Even if the stock makes a big move, the IV crush will significantly stunt your profit, or even wipe it out completely. A better options strategy for trading ERs would be to sell premium in credit spreads. Selling premium is an advanced strategy because it shifts the odds slightly in your favor by taking advantage of IV crush. But it’s not without risks—if the stock makes a larger-than-expected move, your losses can still add up quickly. It’s a trade only for those who truly understand how to manage spreads and calculate risk.

If your buying contracts with several months until expiration, IV crush will not have as crippling of an effect, depending on the ticker and the amount of time you have on the contract. But in any case, unless you’ve already been holding the stock for the long term, getting in just ahead of ER of just gambling.

Bottom Line

ERs are unpredictable. Even the institutions get them wrong, but they make sure to hedge their bets.  While playing them might seem like a quick way to make big money, in most cases it’s a fast track to crippling your account. Even worse is playing them with short term options, which will always suffer from IV crushes, even if the stock goes in your direction. If you want to gamble, just use money that your ready and willing to lose and have a blast. If you want to trade an ER, better to wait until after the release and the IV crush to get in.

Trading Mistakes to Avoid – Not Taking Profits

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In the last chapter we spoke about how taking profits too early can be an account killer over time. The flip side of that can also be true. Holding on to winning trades a bit too long in certain circumstances can end up turning a nice profit into a painful loss. It really depends on the market conditions and type of instrument you’re trading.

High-Volatility Markets

Volatile markets or individual tickers are like wild roller coasters. Price swings are huge and come fast, often reversing before you even have a chance to react. The strong move that you caught in your favor can flip on you in an instant, turning a green trade into a painful red mess. In this type of market, you’ve got to stay tactical and defend profits against potential market sucker punches. You can use tighter stops to protect your gains, if that makes sense based on the chart and your profit cushion. Alternatively, you can scale out of your position or jump locking in your profit and get a good nights sleep. In high-volatility environments, a “bird in the hand” mindset could be the difference between a sea of green and an ocean of red.

For example, let’s say you’re trading a highly volatile stock like Tesla (TSLA) during an earnings week. The stock gaps up at the open and starts climbing sharply from $200 to $220 in just 15 minutes. You’re riding the wave, feeling good, and the trade is deep in the green.

But here’s the kicker: in a volatile market, what goes up quickly can just as quickly come crashing down. Without warning, a negative headline hits the newswire, or traders start taking profits en masse. In the blink of an eye, TSLA reverses, dropping back to $210, then $205, and within minutes, it’s below your entry at $198. What was once a $20-per-share unrealized gain is now a painful $2-per-share loss.

In this scenario, a tactical approach could have saved you:

Tighter Stop: Let’s say you set a trailing stop $5 below the current price as it climbed. When TSLA hit $220, your stop adjusted to $215. As the reversal began, you got stopped out at $215, locking in $15 per share of profit instead of riding the trade all the way down.

Scaling Out: As TSLA hit $215, you could have sold half your position to lock in some gains while letting the rest run. Even if the reversal wiped out the rest, you’d still walk away with a decent profit.

Exiting Entirely: If you sensed the move was running out of steam (e.g., lower volume or resistance at $220), you could’ve closed the trade and taken your $20-per-share profit. A good night’s sleep beats staying up worrying about a volatile market any day.

The key takeaway? In volatile markets, don’t get greedy. Protect your profits and stay nimble. It’s not about catching the top of the move; it’s about walking away with gains before the market slams the door in your face.

Trending Markets

Calm, trending markets or tickers are the exact opposite. The price moves steadily in one direction, with minimal drama or pullbacks. This is where you can relax (a bit) and give your trades more breathing room. Staying in the game longer lets you capture the full ride, boosting your overall risk-reward ratio.

The tricky part? Not messing it up by overthinking. If the market structure is still intact—higher highs and higher lows in an uptrend, for example—resist the urge to micromanage. Let the trade work for you. In this case, patience is the best trade management tool you’ve got.

Just remember, regardless of how calm and steady you think a market is, there can always be totally unexpected event that can blindside and destroy you, if you leave yourself unprotected. It could be a news story about a potential war outbreak or a hedge fund blowing up and dumping it’s entire inventory that can cause the market to dive quicker than a hawk swooping down on an unexacting squirrel (guess who you are?), leaving you watching your green positions turn deep red. That’s why you should always use stops or lock in some profits to avoid a Black Swan event driven disaster.

Trading Instruments

When you’re trading stocks, particular ones with decent volume and tight spreads, you can get out of positions relatively quickly and easily. That gives you more leeway to hold profits longer, because if need be, you can get out without too much damage to your green. You still are at risk for getting hit by a Black Swan event, but the risk of that happening is still small versus your potential to continue profiting based on your original trade plan. Also, placing stops is relatively straightforward with stocks, since you’re dealing with price action alone. Options is a different ballgame.

When you’re trading options, the dynamics of profit-taking change significantly. Options prices aren’t driven solely by the underlying stock’s price movement; they’re also influenced by factors like time decay (theta), implied volatility (IV), and the option’s delta. These variables can work for or against you, sometimes in unexpected ways. Trading weekly options close to expiration takes the volatility game to an entirely different level. While the potential for quick, explosive gains is tempting, the risks are just as intense—if not more so.

For example, let’s say you’re holding a call option on a stock that’s trending upward. Even if the stock keeps climbing, the option’s value might stall—or even decline—because implied volatility drops or the option gets closer to expiration. In this case, holding for too long can cost you big time, as time decay chips away at your premium every day.

As expiration approaches, time decay (theta) accelerates rapidly, eroding the option’s value hour by hour. This creates a double-edged sword: on one hand, a sharp move in your favor can skyrocket the premium, but on the other, any hesitation or sideways action can obliterate the value just as quickly. The closer you are to expiration, the less time you have for the stock to make the necessary move to generate profits. A few hours of sideways price action can cause your option’s value to evaporate, even in a volatile market.

For example, imagine you’re holding a call option expiring in two days. The underlying stock moves slightly in your favor, but not enough to offset the time decay and shrinking implied volatility as the market calms down. Even with the stock moving the “right way,” your option’s value might drop, leaving you scratching your head and staring at a red P&L.

On the flip side, in a volatile market, IV can spike, causing your option’s value to increase significantly. But the same volatility that boosts the option’s premium can also lead to massive swings, wiping out gains if the underlying stock makes a sharp, unexpected reversal. If you’re holding weekly options into or after such events, you might see your premium nosedive, regardless of the stock’s direction.

When you’re trading shorter dated options contracts, especially weeklies, you need to consider taking profits quicker than you normally might when trading stocks or long term contracts. Sure, you might get out too early and miss out on some profit, but the risk reward starts turning against you quickly in short term contracts and a quick drop can wipe you out completely. Even sideways action can eat into your profits.

Bottom Line

Taking profits is one of the most nuanced aspects of trading. It requires balancing the fear of losing what you’ve gained with the greed that tempts you to hold out for more. Managing this balance takes practice, experience, and self-awareness.

Your goal shouldn’t be to time the market perfectly and take profits at the tippy top. While that’s awesome, and might occasionally happen, your greed will probably end up working against you and could cause you to lose what you’ve worked so hard to make.

Your goal should be to manage your risk reward and protect your profits at all cost so that you don’t turn a green trade into a red one. Because in the end, it’s not about how much you could have made—it’s about how much you actually walk away with.

Trading Mistakes to Avoid – Trading Chop

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One of the most dangerous markets you can trade is a choppy market. Characterized by erratic price movements and a lack of clear direction, choppy markets can frustrate even the most disciplined traders and kill accounts in a steady and painful death by a thousand cuts.

Longer term traders will, for the most part, ignore short term chop and focus on their longer term charts, riding out, or even unaware of, the turbulence.  But as opposed to a trending market, where if you trade with the trend you can simply continue raising your stop and go along for the ride, a choppy market will wreak havoc on short term traders by continuously stopping you out and reversing, again and again.

To be totally frank, there are some traders who can successfully trade a choppy market. They are the scalpers, those lighting fast snipers that and can take advantage of quick moves, getting in and out before the rest of us have a chance to get our bearings and click a mouse. If you’ve got “Speedy Gonzales” as your screen name, you can ignore this and keep scalping those choppy markets, which are going to be much more profitable for you that slow, trending price action.

For most non-scalper traders, here’s why trading chopping markets can bleed you to death.

Low Probability Trades

In a choppy market, the lack of direction makes it difficult to identify high-quality setups. Both long and short trades can fail repeatedly as the market chops back and forth. Instead of racking up profits, your trades end up sucking you into a cycle of false breakouts and fake reversals, leading to constant stop outs and losses. When you do finally decide to hold a position thru the chop, without stopping out, it ends up moving against you for a bit longer until you end up stopping out anyway, before reversing once again.

Emotional Traps

Choppy markets are a breeding ground for emotional mistakes that destroy your trading psychology. The whipsaw action can lead to overtrading, revenge trading, and chasing moves that go nowhere, leaving you frustrated and mentally and emotionally exhausted. Continuously making mistakes and breaking your rules will shake your confidence and make you fearful of taking good trades that come your way in the future.

Risk-Reward 

Tight ranges and erratic price movement will minimize your potential reward while keeping your risk high. In such conditions, even if you win a trade, the profit will most likely not justify the risk taken. You’ll often be risking more than you stand to gain, which is not the type of risk-reward relationship you should be seeking as a trader.

How to Avoid Choppy Trading 

Recognize the Signs

Before entering a trade, check the market’s behavior on multiple timeframes. Is the price continuously bouncing in a tight range? Are the candlesticks lining up in a barcode formation and the price pretty much flatlining? These are clear signs of a choppy market that you want to avoid.

Wait for Breakouts with Confirmation

Instead of guessing when the market will start trending again, wait for a breakout accompanied by strong volume and clear momentum. Look for higher highs/lows in an uptrend or lower highs/lows in a downtrend to confirm direction.

Watch and Wait

Patience is a superpower in trading. Sitting on your hands during indecisive conditions isn’t a missed opportunity—it’s a strategic decision to protect your capital and mental clarity for when the odds are in your favor. No one is forcing you to trade. It’s totally your decision, so just sit out a choppy market and wait for an opportunity that you can be sure will eventually present itself.

Bottom Line

Choppy markets can drain your account and destroy your trading psychology. The good news? You don’t have to trade them. By recognizing the signs, waiting for confirmation, and staying patient, you can protect yourself from unnecessary losses and preserve your capital for when the market truly offers you an edge.

Don’t let the chop chew you up. Stay disciplined, sit out the turbulence, and wait for the next great opportunity.

Trading Mistakes to Avoid – Premature Profiteering

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One of the biggest mistakes traders make is taking profits to early. Now you might be smirking and waving your hand as you read this because we’ve all heard the saying, “You can’t go broke by taking a profit.” I hate to break it to you, but you can most definitely go broke taking profits if you take them faster than you take your loses.

For example, if you take your profits when you hit a 10% gain and hold your losers until you’re down 20%, you don’t need advanced math to know that you’ll be out of business pretty soon. It reminds me of the joke about the owner of the suit factory who tells you that he loses $10 on every suit, but makes it up on the volume!

Of course, if you make sure to cut your losses more quickly than your winners, then you will make a profit. But you’re profits are going to be a fraction of what they could be, and you’ll need a super high win rate to make decent money from lots of small profits. Depending on your personal objectives, that might work well. For the overwhelming majority of traders, it doesn’t.

There’s another famous saying, “Don’t trade your P&L.” What that means is that you should take your trade entries and exits based on your analysis, be it technical or fundamental, and not based on your profit and loss statement. In other words, if you’ve decided that you believe XYZ is breaking over resistance and heading 20 points higher to the next resistance level, you should let that plan play out (with a stop in place in case you’re wrong). If you watch your P&L, you might get thrown off by your profits and start worrying about giving it back and, next thing you know, you’re out of the position with a 5 point gain and watching, and kicking yourself, as you then watch your trade plan play out exactly as you figured.

Not trading your P&L is going to help you avoid the mistake of taking profits too early, but there will be times when you simply won’t be able to help it, and when taking profits might even be the smartest path to take. The most blatant scenario that comes to mind is when you’re trading very short term options contracts, particularly weeklies or same day expirations. When you’re trading these rapidly expiring instruments, you are battling forces beyond price action, such as time decay and implied volatility, that can quickly crush your contracts even if the price remains stable.

For example, say you buy NVDA 135 strike weekly call options on Monday that expire on Friday. The stock is currently trading at 130 and you think it will hit major resistance at 135. Ideally you’d want NVDA to get close to 135 before selling your calls. On Wednesday some positive news comes out and NVDA jumps to 133. Your calls options rise along with the stock and get an extra premium boost because of the spike in IV on the news. At this point you glance at your P&L and see a beefy green profit number on your calls. While the chart is telling you to continue holding, you need to take into account that since you only have 2 more days until expiration, your calls going to start deteriorating faster and there’s a good chance that the IV pump you got off of the news will disappear too, which in turn will most likely cause your calls to lose some value. So even though the chart is telling you to hold, your hefty green profit is telling you to cash in asap. Could your original thesis play out by Friday and give you an even bigger profit? Absolutely. But the risk reward on the trade no longer favors you holding it and risking a portion, or all, of your profits.

There might also be times when you catch a quick move and suddenly find yourself sitting on a hefty profit and, despite the fact that the chart is telling you to stay in, you simply can’t ignore that stack of cash waiting to be claimed. It’s OK to take the money and run. You might very well be kicking yourself later, when the stock continues higher, but at the moment, you probably won’t be able to keep your emotions in check if you don’t take profits. You might mitigate your risk, and emotional stability, by taking only partial profits and letting some ride. Of course, had you not looked at your P&L at all, you would be able to remain in the trade and possibly emerge with a much larger gain.

Bottom Line

Cutting your profits short can crush your trading account over time, even if it feels good in the moment. The key is to trade with a clear plan and trust it. Yes, there are situations where locking in gains early makes sense, but for most trades, you need to let the setup play out. Don’t sabotage your potential by reacting emotionally to your P&L. Stick to the strategy you designed when your head was clear. Remember, trading isn’t about how often you win—it’s about making your wins count more than your losses. That saying, “You can’t go broke by taking a profit” doesn’t apply to most traders who end up holding losers far longer than winners. If you cut your profits too soon, you absolutely can go broke in the long run.