The Most Common Trading and Investing Mistakes, and How to Avoid Them

Most traders who lose money do not lose it to an exotic cause. They lose it to a short list of ordinary mistakes, repeated often enough to matter. The mistakes are well documented, they are mostly about behaviour rather than analysis, and each one can be reduced with a rule written before the trade rather than willpower during it.

This article covers the five that do the most damage, what the evidence says about them, and a practical fix for each. It is educational, not advice, and it assumes trading involves a real risk of losing some or all of the money you put in.

What the evidence says about retail results

Two bodies of evidence are worth knowing. The first is academic. Brad Barber and Terrance Odean studied the accounts of 66,465 households at a US discount broker between 1991 and 1996. The average household earned 16.4 percent a year, against 17.9 percent for the market. The 20 percent of households that traded most, turning over their portfolios far more often than the rest, earned 11.4 percent. The authors' conclusion was that trading itself, through costs and poor timing, reduced returns. The sample is old and covers stock investors rather than leveraged traders, but the link between activity and lower net results has been replicated in other markets.

A later study by Barber, Lee, Liu and Odean looked at day traders on the Taiwan Stock Exchange over many years. In that data, a very small share of day traders (under 1 percent in the study's own estimate) earned positive returns after fees in a way that persisted from year to year. That is one market and one period, so treat it as a caution rather than a universal figure.

The second body of evidence is regulatory. Since 2018, European rules written by ESMA have required firms offering CFDs to retail clients to show a standardised risk warning that includes the percentage of their retail accounts that lose money. The UK's FCA applies similar rules. The percentage differs by provider and changes with each reporting period, so this article does not quote one. You can find the current figure for any broker in the warning on its website, and it is worth reading before opening an account.

Mistake 1: Trading too often

Every trade has a cost: the spread, commission, swap and slippage. Those costs are small per trade and large in total. They also do not care whether the trade was a good one. A trader who takes forty marginal trades a week pays forty times.

An example with assumed numbers: a trader opens positions of 0.1 lots on EUR/USD, where one pip is worth about $1, and pays an effective cost of 1.0 pip per round trip. Each trade costs $1. Ten trades a year cost $10. Four hundred trades a year cost $400, which is 4 percent of a $10,000 account, and the strategy has to earn that before it earns anything for the trader.

Overtrading usually comes from boredom, from watching a one-minute chart all day, or from the feeling that a missed move must be recovered. The fix is to define in advance what a valid setup looks like and to treat every other moment as no trade. A cap on the number of trades per day is a blunt but effective rule.

Mistake 2: Risking too much, with no stop

Leverage lets a position be much larger than the cash behind it, so a small move against you can be a large share of the account. Without a stop placed at entry, the size of the loss is decided later, in the middle of a decline, when judgment is at its worst.

Losses are also harder to recover than they look, because the gain needed to get back to even grows faster than the loss.

The fix is to decide the maximum loss before entering, place the stop at the level where the idea is wrong, and then size the position so that the distance to the stop equals a small, fixed share of the account. The articles on how much to risk per trade and where to place stop-loss orders cover the arithmetic.

Mistake 3: Selling winners early and holding losers

Hersh Shefrin and Meir Statman named this pattern the disposition effect in 1985: investors tend to sell assets that have gained and hold assets that have lost. Odean's 1998 study of 10,000 brokerage accounts found that investors realised their winning positions at a markedly higher rate than their losing ones, which tax considerations do not explain. The result in December, when tax-loss selling is common, was the exception.

The behaviour fits prospect theory, developed by Daniel Kahneman and Amos Tversky. People do not weigh gains and losses symmetrically. In Tversky and Kahneman's 1992 estimates, a loss was felt roughly twice as strongly as an equal gain, with 2.25 as a commonly cited coefficient. Selling a loser makes the loss real, so it is delayed, and selling a winner locks in a pleasant gain, so it is hurried.

The result is a trader who is right half the time but earns small wins and large losses. The next article on psychological barriers works through that arithmetic. The fix here is mechanical: a stop set at entry and a target or trailing rule decided in advance, so the exit does not depend on how the position feels.

Mistake 4: Adding to a losing position

Averaging down means buying more as price falls, which lowers the average entry. It feels like a discount and it changes the maths in a dangerous way: the position gets larger exactly when the original idea is being contradicted. A single mistaken trade becomes a much bigger one.

There is a legitimate version, which is a pre-planned scale-in where the total risk is fixed in advance and the stop covers the whole position. The mistake is the unplanned version, added because of a refusal to accept the first loss. The article on the buy-the-dip trap gives a worked example. A simple rule is to add only to positions that are moving in your favour, never to those moving against you.

Mistake 5: Revenge trading and chasing tips

After a loss, many traders increase size or take weaker setups to win the money back quickly. The market has no memory of your loss and offers no repayment. The trade after a loss is just another trade, and it is usually taken in a worse state of mind than the one before.

Chasing is a close relative. A price has already moved sharply, a post or headline is everywhere, and buying feels urgent. By the time a story is widely shared, much of the move has usually happened, and the entry has no logical stop nearby. Unverified tips from social media and chat groups belong in the same category. If you cannot say where you are wrong and how much you will lose if you are, there is no trade yet.

Two rules help. First, a daily loss limit, for instance stopping for the day after losing a set share of the account or after a set number of losing trades in a row. Second, a short written checklist that every trade must pass: trend and level, entry trigger, stop, size, and the reason the trade fits your plan.

Putting the fixes together

None of this guarantees profit. A sound process can still lose, and the point of these rules is narrower: they stop a bad stretch from becoming an account-ending one and they make mistakes visible. A trade journal that records the setup, the planned stop, the result and whether the rules were followed will show over a few dozen trades which of the five mistakes you are most prone to. Fix that one first.

Sources: Barber and Odean, Trading Is Hazardous to Your Wealth (Journal of Finance, 2000); Barber, Lee, Liu and Odean, The Cross-Section of Speculator Skill: Evidence from Day Trading; Odean, Are Investors Reluctant to Realize Their Losses? (Journal of Finance, 1998); Shefrin and Statman (1985); Kahneman and Tversky (1979) and Tversky and Kahneman (1992); ESMA CFD product intervention measures; FCA retail CFD rules. Next in the series: The Buy-the-Dip Trap