There is no trading system that constantly hits highs and lows

Trying to catch the highs and lows is a common mistake of novice traders, but not only them. Once a trader becomes more experienced, he feels that his system coupled with his knowledge and experience should be sufficient to enable him to spot a high or a low and react accordingly.

When the market reacts to an event and moves sharply, it is a temptation to try to be smarter that other traders. When an experienced trader is buying a rising market having identified a correction within the major trend, a novice trader is quite often establishing a short believing that he has spotted the top. Then the novice is on the wrong side of a rising market and having abandoned the old adage “the trend is your friend” is on the path to a losing position.

As a novice trader, looking at historical charts it seems easy to spot the high and lows. Most people have 20/20 hindsight! However without confirmation opening a position against the major trend is a sure way to reduce your available capital! 90% of trend reversals are simply corrections and picking the 10% is not an easy task or a sensible use of time and money.

Here is an example of opening a position opposite to the main trend and an attempt to catch the high on the DAX index.

In February 2015, after breaking the resistance at 10100 points, the DAX started a new upward impulse, which stopped at the 11000 points. The price action pattern appeared on the daily chart and it looked like the uptrend may be near to completion.

common mistake of novice investors

However, the expectation that a strong uptrend will finish after one single candle or it will cause a trend reversal usually ends badly. The conclusion here is: it is better to open a position after confirming the direction. Just remember “trend is your friend”.

common mistake of novice investors

Leave us a comment!