Back in 2013 I left my job as a Business Consultant to start working for a Derivatives Trading firm as a Proprietary trader.
It was around the time where I was taking more of an interest in finance and investing, and I happened to have three friends already working in this company as traders. After speaking to one of them about the job I decided to take a leap and see if I could handle it.
As a proprietary trader I was paid a base salary to trade the company's money on the financial markets. Any profits from trading would go to the company and I would only start to see some of it as a bonus if the profits went above a certain threshold for the year.
Essentially, the lion's share of profits from my successful trades wouldn't come to my own bank account but my own money wasn't at risk either - so I figured that would be as fair a deal as I could expect to get started in the industry.
The trading style was quite fast paced with positions being opened and closed within the same day, often within an hour in the more active markets. Of course, I also held positions for longer periods if I saw a trend but the primary focus was on making a lot of trades, which meant getting in and out quickly every day.
This is basically what a day trader does.
As someone who writes about working towards financial independence by taking a long term, well-diversified investing approach my trading style back then might surprise you. But that was my introduction to the financial markets and if I could describe it in one statement it would be this:
I basically didn't have a clue
My time as a proprietary trader was among the most stressful I've ever experienced but it was also a time of great learning and self-discovery. I made a huge amount of mistakes, got caught in psychological traps, and had the opportunity to understand myself much better than before.
Despite leaving the job after around 18 months to go back to Business Consulting, the experiences from that time have stayed with me since and the lessons I learned have shaped my investing strategy to this very day.
I can gladly say that my performance is far superior in comparison to back then.
If you're someone who has thought about getting into trading here are three key mistakes that I made which really screwed me over, and what I would do now to address those errors.
1 - Being too attached to a technical pattern
One of the approaches to trading is based on Technical Analysis which is the practice of reading and analysing the charts, looking for patterns and using them to help you anticipate what the market is going to do next. Based on that analysis you would place your trades so that you have a position in the market ready for that next move.
As a technically minded person I was immediately drawn to this style of trading.
The problem is, the patterns are never a guarantee and should only be used as signals on what might happen. And even if what you thought does happen, it may not be to the same extent as what you were thinking.
For example if the market is hovering around £10 and I see a bullish pattern - indicating the market might go higher - I would buy in at £10 and aim to sell at £13 based on the technical levels that I was looking at. This would give me a profit of £3.
I would become overcommitted to this pattern by believing that the market will go higher no matter what - and would ignore how things continue to develop. If I bought in at £10 and the price fell a little, perhaps down to £9.50, I would brush this off and tell myself "I saw a bullish pattern, so it's going to come back and keep going up".
Now there is always a margin of error that you allow so the price moving lower a little bit in this manner isn't exactly a problem yet.
But when the price continued to fall further, down to £9, then £8.50, then £8, I would continue to be anchored to that bullish pattern and ignore the fact that the market had already moved on and I should be cutting my loss and re-analysing the chart to find the next trade.
Alternatively the market might actually do what I originally expected and move higher after I bought at £10. But it might not go as high as £13 which is what I was expecting. Instead it could rise up to £11.50 and then start to drop back down again, perhaps all the way down to £8 or lower.
This type of move where the market initially rises was particularly dangerous for me, because it gave me a slight taste of "being right". So I would be even more attached to my position, even after it had fallen in price, just because I saw it go up slightly at the start.
Technical analysis is a great tool for any trader who wants to navigate the markets because it is a method of identifying which price areas are worth looking at and considering a trade, based on historical patterns and activity.
But don't do what I did and treat each pattern as the "be all and end all".
A lot of the time when using technical analysis you will try to anticipate a pattern that is currently still forming and try to position yourself in the market before it has completed. For example you might see a pattern that is showing almost three tops, known as the Triple Top pattern, and you might sell the market in preparation for the next move in the market.
Author's note: The Triple Top is a bearish pattern which typically indicates that the market might be preparing to make a move downwards.
But take note that I said "almost", meaning that it hasn't completed the pattern - you are simply anticipating that it could, and positioning yourself in the market early.
Always remember that a pattern must complete in full before you can officially consider it to be a particular pattern. They all have specific criteria before they are considered "complete". If it's close, but doesn't meet the criteria, it doesn't count.
If that third top doesn't complete its formation and the price starts to go back up, the best thing is to disregard the trade that you placed early - even if it means getting out at a small loss - and re-analyse.
Don't hold on to your trade (as I would have in the past) thinking that the pattern will eventually complete just because it came close before. Quite often, if a pattern fails to complete it indicates that the market will do the opposite of what you anticipated. Usually this is because everybody else looking at that potential pattern will be getting out themselves, which can cause a bit of a stir in the market.
So if you're still holding onto that trade you could be in for a lot of pain.
Even if the pattern does complete, be cautious of any sudden changes in the market. It's nice to think that the price will continue in the direction that you want it to without even looking back, but on many occasions it will try to retest a certain level. Keep an eye during these moments because there might be a signal telling you that the pattern is going to fail, in which case you should be prepared to get out of your trade if necessary.
Technical patterns are always forming in the market so if one of the ones you find doesn't work out the way you hoped, don't let it get to you. Remember that nobody can ever know what the market will do in the future so it's unreasonable to think that a particular pattern can guarantee a win for you.
Instead, simply use the patterns to help your thinking and planning process for a trade.
2 - Not planning my trade
Trading psychology is funny in a way because the natural thing you'll want to do is usually the opposite of what you should do.
Whenever you have a trade that is winning you instinctively want to cash it in so that you don't lose those profits. But with a losing trade you become reluctant to get out at a loss because you're worried that you will miss out if it happens to come back.
You actually need to do the exact opposite, which is obvious when just reading it in an article - but somewhat harder in practice.
One of the worst things I used to do was be so nervous about missing out on profits that I would almost immediately get out of a trade the moment the market stop moving in the direction I wanted it to go.
I might buy in at £10 and target to sell at £13, but when the market appeared to stop rising at £11 I would simply take the £1 profit. A short while later, the market would continue to go up like I originally expected but since I had already cashed in I was no longer benefitting from the move as I should have.
Author's note: You might pick up on the difference of this example compared to my first lesson, where I let it go up to £11.50 and then all the way back down. I did both of these "bad practices" and it was random which one I would pick for the day. That's what happens when you don't have a fully fleshed out plan.
Now this sounds like the smart thing to do because at least I didn't lose money by holding on if the market actually fell a lot (as described in the first mistake), and at least I'm walking away with some profit.
But the market taking a pause in movement, or even going in the opposite direction slightly are actually normal behaviours. In a number of cases they might even be considered a signal that the market will continue to go in the direction I wanted it to go.
But I lacked the confidence to allow the trade to play out in full and got out too early.
The other really bad thing I did was double down on my losers in the hopes that I could make my money back without needing the market to go back as far as I needed it to.
An example is if I bought 1 unit at £10 and the price dropped down to £8, I would buy another unit. This means I would have 2 units for a total of £18, which is an average of £9 per unit. By doing this I would no longer need to wait for the price to rise all the way back up to £10 in order to "break even" on my first purchase.
Essentially I would be increasing my exposure on a losing trade, and if it continues to go in the wrong direction I would only be seeing bigger losses. It would have simply been better for me to admit my trade was wrong and keep the loss at a minimum, so that I could move onto finding the next trade.
These behaviours were often a result of me not having a plan for my trades, and simply winging it based on what the market happened to be doing at the time.
Plan the trade, and then trade the plan.
You want to be as emotionless as a robot when you're actually executing a trade, so that you don't need to make any decisions while the trade is active. You simply want to follow a set of pre-determined actions based on what happens, and regardless of what might happen afterwards.
This means that before you place a trade you should do everything you can to fully plan for it. Obvious things to plan would be:
What price are you going to enter the trade?
Where will you exit for profit if the trade goes well?
Where will you cut the loss if the trade goes badly?
But you also need to ask yourself:
What if the price starts to retrace a little bit, how much of a retrace will you tolerate?
If the trade goes well will you exit the entire position at the same time, or keep a small amount to let it continue the run?
If you can't get the price you wanted to enter at, what will be the backup option if any?
If the trade starts off badly, would you consider reducing your position to minimise exposure?
If it then comes back, would you build that position back up? At what entry price?
If the trade doesn't go to the target profit price, but also doesn't fall to the stop loss price, will you keep holding onto the position over a longer term until one of those prices is reached?
The list can go on and the more comprehensive you are, the better prepared you will be.
By asking a full range of questions you will be able to automatically know how you should react based on what the market does next. You then know you're not going to be caught off guard and unable to make a decision when the pressure is on.
Having the plan also helps you to handle moments in the market that could make you nervous while the trade is active.
For example if I had asked myself "How much of a retrace will I tolerate?" I might have been able to hold onto my profitable trade that I mentioned earlier (where I got out too early) and capitalised on the continued move. Because if the retrace wasn't big enough I know I could keep holding on without needing to panic or second guess myself.
It also would have saved me from holding on too long as I did in the first mistake (Being too attached). The plan would have determined much sooner that the retrace was too big and I would have gotten out, most likely for a little bit of profit instead of a big loss.
The plan would have allowed me to let the trade play out in full, and I wouldn't feel like I missed out on anything as I had followed a set of pre-determined steps.
This would be true even if the retrace was big enough to make me get out of the trade, only to then continue in the direction I originally wanted. This can and will happen sometimes but since you are following a plan you can't let yourself get too upset about it.
Sometimes it just means you adjust your plan when you think it needs a bit of fine tuning to handle certain scenarios. Other times you just accept it as a part of trading and stay confident in the knowledge that your current plan is going to work more often than not.
Always remember that you don't need every trade to be perfect, you just need your plan to be profitable in the long run.
3 - Trading unfamiliar markets just for activity
Back at the Derivatives Trading firm I was primarily responsible for interest rate markets such as Euribor, and a few smaller commodities markets. All of them were very slow moving at the time (maybe they still are) and it took a while for trades to come to fruition.
In fact the markets would be moving so slowly I might be waiting hours for my orders to get filled, meaning I would just sort of be sitting there doing not very much (pretending to do something).
Towards the start this wasn't such a problem because I could obviously analyse the charts and study the fundamentals of the market, but eventually I got to a point where I already knew what the chart looked like and there wasn't a whole lot of news coming out - nothing that would move the markets anyway.
Author's note: Actually there was one time where a large news agency unexpectedly tweeted that there were reports of a bomb going off in the White House. This made the Eurodollar markets go quite crazy for a brief time.
Eventually I started getting antsy and would start looking at faster moving markets such as Oil and Gas.
Despite these markets not being my remit, and despite not having any prior knowledge or experience with them, I started to make trades just so I could be in on the action.
I didn't know where the key levels would be (certain prices with lots of activity) and what had historically happened at those key levels, i.e. Would there be big players getting involved with iceberg orders and making sure that the market didn't go past that level?
Even though I did look at the chart I wouldn't have a good feel for the technical patterns that I relied on for the other markets. Yes, I would recognise them being formed but I had no knowledge on how the markets reacted to such patterns.
With Euribor I'd know that a particular pattern might take weeks or months to complete, and even after completion it could be another week or so before anything significant happened. With the Oil markets I didn't know if it would respond in the same way or if it would only take a few hours.
Plus the additional activity of the market meant that there were a lot more short term traders taking part - these people might not care so much for longer term patterns and simply be trying to scalp small short term wins. This basically introduces more volatility in the market and that in turn means the plan would need to be adjusted.
I didn't adjust my plan because I didn't have one in the first place.
As a result, I lost quite a lot of money in those unfamiliar markets.
Whether you're moving from one type of product to another (like my example), moving from one stock to another stock, or moving between similar commodities such as Gold and Silver, it all requires preparation.
It also requires discipline and patience because doing preparation probably means you need to forgo the current opportunity that might have drawn your attention to that market in the first place.
But it's for the best because if you trade a market without a lot of knowledge about it, you're probably just setting yourself up for failure in the long run. You might win the initial trade but can you attest to continued success?
Never forget that there will always be new opportunities in the future, so don't hold on to one in particular.
Always keep your existing markets as the foundation of your trading, because those are the markets you are more familiar with and at least have some experience. And in the spare time between trades in those markets do some study of the new market you want to get involved in.
Don't just look at a chart for a general direction, study and analyse it over many different views. Look for long term patterns on an annual view, but also look for particular movements and behaviours on the shorter term views. This can help you understand if a pattern does actually hold in the long run but could be subject to some volatility which means your plan may need to be a bit more accepting of a market retrace.
You also want to know about any key data announcements that could affect the market. With the Oil markets there would be regular announcements on the amount of oil production, and the markets would react if it was too high or too low. If you're trading a stock you might want to be aware of any earnings or dividends reports.
You also want to understand how that data, and various other factors, affects the market. On the basic level you might assume that overproduction would lead to a lower price (more supply) but this wasn't always the case. So understanding all the different factors is going to be really important.
Only after you've gone through this study should you then start to simulation trade the market. Simulation trades are usually based on the live markets so it can help you get a good feel on what it's like trading there. You can try executing your plan to see how your trades play out, and make adjustments based on what you learn.
I would recommend allowing a few weeks for this whole learning process, because you really want to give yourself the opportunity to get involved in quite a lot of simulation trades so that you can gather as much experience as possible.
One risk of simulation trading is seeing early success in the market through sheer luck. While it's good that you get a winning trade early on you should never let it get to your head. There's no such thing as "having a knack" for the market and you shouldn't use this as an excuse to jump straight in to the real deal earlier.
Jumping in early could mean you're no longer trying to learn and absorb knowledge about the market - because you're just going to be focus on winning the trade - and that could mean your plan isn't developed properly which could cost you your long term financial success.
The trade is the battle, your financial success is the war. Win the war, not the battle.
To be really honest the best lesson I can give you is don't get into trading.
You're better off passively investing into a well diversified fund as it's low effort, low cost and low stress for much better performance.
Being a trader was among the most stressful times I've ever experienced. The hours are extremely long and it requires intense focus throughout (if you want to be good at it). Things will continue to play on your mind even after the markets have closed for the day.
You hear stories of day traders checking their trading app every 5 minutes and this really isn't an exaggeration. It will consume your attention at the detriment of other areas of your life - be it with family, at work, or simply your own time where you would normally enjoy other things.
It's honestly completely draining and just not worth it in my opinion.
Remember that even the professionals often get the markets wrong - and I mean real professionals who work for major institutions, unlike myself who was just some young kid with an ego.
So it's almost insane to think that someone could casually outperform them, much less the market, over the long run. For every super successful trader you read about there are likely hundreds of people who risked, and lost, everything. Don't let that one lucky person skew your view of things.
The first and worst mistake of them all is thinking you could be the exception.
To strengthen this point, my intake at that Derivatives Trading firm consisted of 12 people. Within a year we were down to 6, and another six months later I myself was leaving. At that time there was only 1 more person from my class still standing - and they were barely staying afloat.
My three friends who were already working at the firm also resigned somewhere along the way (before I did), and many others alongside them.
I'm not saying it's impossible to be a successful trader, but it is certainly much harder than you realise.
Hey - just one final word before wrapping up - The idea to write this article came from the 19th podcast episode of Telescope Investing, where the hosts talk about their biggest investing mistakes. Learning from the mistakes of others is a great way to improve your own knowledge without taking the risk yourself so this is well worth listening to.