Trading Mistakes to Avoid – Too Heavy

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.