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2023-03-13 • Updated

Common Knowledge is a Trading Trap

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It is no secret that trading can be just as risky as it can be profitable. Many amateur traders dive into it without a proper plan or strategy in place, which costs them lots of money. But an even bigger mistake they can make is blindly trusting common knowledge and thinking that it is enough to ensure profitable trades.

In this article, we will discuss what common knowledge in trading is, how it can be detrimental to traders, the most frequent traps traders fall into, and tips for avoiding trading traps.

Key Takeaways

  • Common knowledge includes basic information amateur traders get from learning resources, like existing strategies, patterns, tools, software etc.
  • Common knowledge can become a trap if traders trust it completely without analyzing the market conditions and taking risk management measures.
  • Most common traps in trading include overanalyzing market conditions, trading without a set plan, overtrading, putting all money in one trade, and poor risk management.
  • Traders can avoid these traps by paying more attention to the current market conditions, having a detailed risk management plan, not relying on their predictions alone, and being flexible with their trading strategy.

What is Common Knowledge?

To put it simply, all the information new traders learn before starting trading is considered common knowledge. This includes various strategies, patterns, indicators, and other tips and tricks you can usually pick up from various courses and guides for beginners.

This information is important, there is no denying that. But oftentimes amateur traders accept it as an indisputable fact without realizing that nothing is definite in trading and these patterns and strategies they rely on to predict future price movements don’t really guarantee that the market is going to move in their favor. But why this happens is what we are going to look into next.

How can Common Knowledge be a Trading Trap?

There are multiple reasons common knowledge can become a trading trap.

As a rule, common knowledge relies heavily on the idea that market movements can be predicted. But in reality, it is not true. The thing is, it is mainly used by individual traders that have a very limited amount of money to trade. So their trading decisions do not really affect the movement of the market. But what does affect the market is the decisions of big financial institutions with enormous amounts of capital to spare. They are the ones really controlling the movement of asset prices, and no common knowledge can help you really predict their next move.

Another reason is that trading is essentially an opposition between buyers and traders, who try to benefit from the same market conditions. If one party wins, the other is going to lose. They use the same strategies and tools, watch for the same patterns; yet, this common knowledge helps one party and traps the other.

This shows that a trader’s success can’t be attributed to their ability to apply common knowledge in practice. Rather, it depends on other factors and behaviors that a lot of traders overlook while making their decisions.

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Common Mistakes and Traps in Trading

Overanalyzing

When beginners start learning about trading, they often don’t know where to look first. They see information about various trading software or systems and try to incorporate them all into their trading strategy.

What they fail to realize is that different tools suit different trading styles. Using every trading software at once can get overwhelming and exhausting, making it hard for a trader to develop a good strategy.  Different tools can also give contradicting results that end up further confusing the trader and contributing to future loss.

Lack of plan or discipline

Having a trading plan can help beginners to keep to their strategy and understand their goals and financial capacities. Trying to wing it and trading without any preparation is extremely unwise and can lead to huge losses when a trader faces an unexpected market movement. What is more, trading without a clear plan makes traders more susceptible to their emotions and a gambling mindset.

Overtrading

The main reason a lot of traders fail to make stable profit from trading is their tendency to trade too much from the very beginning. Overtrading is a huge problem that can cause traders to accumulate a lot of spread and commission costs as well as burn through their money faster. Instead of overtrading, traders need to slow down and take a more calculated approach before they lose everything they have.

Poor risk management

Some traders can’t accept that they might end up losing money, so they don’t plan accordingly. But losing is just an inevitable part of trading, and ignoring this possibility is a bad idea. The least traders can do if preparing a risk management strategy seems like too much work is not risk more money on a trade than they are comfortable to lose.

Not controlling money

Trading with real money can make even the most sensible traders lose their focus. When real money is involved, it is easy to give in to the urge to jump straight into action and use all the money you have. But trading requires a well thought out plan and skill. Not limiting the amount of money you trade will eventually lead to disaster.

Tips for Avoiding Trading Traps

Here are some tips for how you can avoid these trading mistakes and traps:

  • Prepare for the worst. Even if you are confident in your strategy, make sure you have an exit plan in case the market doesn’t move in your favor.
  • Don’t rely on your predictions. Even the most popular indicators can’t be trusted completely, so keep a close eye on the price movement to act fast if your prediction doesn’t come true.
  • Make a trading plan. A trading plan can help you keep your finances in check and avoid submitting to your emotions and making rash decisions.
  • Be open-minded. If you see the market movement diverge from your expectations, don’t be stubborn and adjust your strategy accordingly to save your money.
  • Don’t panic. It is better to stick to one strategy than jump from one decision to another. Change your plan when you are absolutely sure it is necessary and stay focused.

Bottom Line

Common knowledge can help amateur traders understand the basics of trading, but it isn’t a good idea to rely solely on what you learned from your beginner’s course. Make sure to pay attention to how the market actually moves instead of sticking to your predictions, have a good risk management strategy in place, and you can avoid the most common trading traps and mistakes.

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