Six classic mistakes young traders make

The question I am often asked is, "How do know if someone has what it takes to be a great trader?' There is no checklist. Being a good trader is part science, part art.

However, one trait that is universal among all good traders is eliminating mistakes. One mistake can ruin a lot of good work. Here are the top six mistakes that young (and old) traders make:

Worried stockbroker on phone
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1. Cutting winners too soon

This is a very classic mistake. Young traders are too quick to take a small profit when a position starts to go their way and miss the really big move. Be patient with winning trades.

Apple is a great example. If you had made a $10,000 investment in Apple in July 2002, nine months after the release of the first iPod, you would be a millionaire today.

However, how many people do you know who became millionaires trading Apple? Apple is an example of a company that everyone knows about; its explosion was in front of everyone's eyes; but it remained under owned by the public.

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You may have heard ridiculous phrases like, "It's had such a big move, it can't go up anymore." In fact, when the stock was trading around $700 (before splitting 10 for 1), I heard more Apple bears than bulls.

Perhaps, it's human nature to take small gains. However, to really make a lot of money trading, you should try to be very profitable on a few trades, as opposed to trying to be slightly profitable on every call. After all, at the end of the day, there is only one way to keep score.

2. Letting losers run

This is the second classic mistake. Young traders fall in love with losers and never get out. Be impatient with losing trades! The key on losing trades is to set hard stop losses and move on.

Novice traders look for excuses on why the market is wrong and hold onto these fleabags. Remember the market is always right! You will hear excuses like "The stock is down so much, it can't go lower." Well it can go lower! Look at classic examples like Blockbuster, Polaroid or Donald Trump's popularity among Mexican-Americans.

Perhaps, inexperienced traders hesitation to cut losers stems from the fact that it is admitting defeat. Get over it! Sometimes the best trade is to get out early to only lose 5 percent, when holding too long costs you 50 percent.

3. Doing the consensus trades

One mistake young traders make is falling in love with consensus trades. If everybody loves the trade, it must be good right?

Getting into consensus trades is like playing a game of three-card monte. It looks so easy, you make a few bucks and then all of a sudden, you lose all your money and can't figure out what happened.

Consensus trades usually mean that all the news is priced in. Then, what happens is that sentiment reverses and inexperienced traders never react quickly enough. They tend to get stopped out at the worst possible time, lose all the money they made, and claim the game is rigged (just like three-card monte).

4. Listening to Wall Street geniuses

Warren Buffett famously said, "Derivatives are financial weapons of mass destruction" in Berkshire Hathaway's 2002 annual report. Last month he stated, "In my view, derivatives are financial weapons of mass destruction that … are potentially lethal."

I traded long-term S&P 500 options for Bank of America from 2002-2009, and the biggest seller of long dated S&P 500 puts was ... Berkshire Hathaway!! The man warning us about the nuclear threat of derivatives was enabling the massive destruction of the global markets.

That's like President Obama warning about the threat of a nuclear Iran, then enabling them to build a bomb that could cause massive destruction. (Oh wait, that is happening.)

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So why, on one hand, is Warren Buffett warning about the dangers of derivatives and then selling naked puts? Possibly to deceive sell-side traders into thinking they know his direction, when he is actually doing the opposite.

The point is that, when listening to these Wall Street icons, they are saying things publicly for a reason and it's not to your benefit. So, next time you hear Carl Icahn or Bill Ackman publicly talking about their market views, be careful!

5. Bad time-management habits

There are tens of thousands of stocks in the U.S. alone. There are stock markets in every major country, Along with bond markets, currencies, commodities, etc. With so much information, every good trader works hard but they have to work smart.

For example, if a company looks attractive, figure out what it does! The best place to figure that out is its website. Working smart means keeping it simple. Get the important information as quickly as possible and forget the noise.

Time management also means forget about past trades. The future is in front of you. Worrying about what you coulda, shoulda done, is time wasted. And time means money.

6. Not focusing on your strengths

A common mistake most inexperience traders make is trading outside their comfort zone. I often see young traders have a little success trading U.S. stocks, then decide they can also trade brent crude futures.

Stick to what works. Work really hard at what you are good at. That's how you become great at something. You would never see a great stock investor like Peter Lynch stop mid-career to go trade short- term Greek debt. Just like you wouldn't see Michael Jordan quit basketball mid-career to go play baseball. (OOPS!!)

The point is, when you get good at a particular style of trading, get great at it! You can't be great until you are good. That's how you build a long-term career at this. Focus on your strengths.

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Commentary by Raj Malhotra, a senior trading mentor at the Institute of Trading and Portfolio Management (ITPM). He has worked at Wall Street firms covering three continents, including at Bank of America, BNP Paribas and Nomura. He also does stand-up comedy in New York City (Raj Mahal is his stage name). Follow him on Twitter @RajWSGuru and @RajMahalTweets.