We’re all human and we all are driven by our emotions, especially fear and greed or keep very high-profit expectations. Either way, we often fail to do proper research. Many novice stock traders enter full throttle into the markets, but they soon realise that making money consistently, isn’t that easy.
You’ve got to get the strategies right every time. If you want any chance of success, you need to know all the rules first.
As investors, you must learn that making ‘mistakes’ is unavoidable. Even the full-time professionals of stock markets have made many trading mistakes. The key to their eventual success is to learn from them and minimise them in future.
Not only do you need to learn what to do, but you also MUST know what to steer clear of.
In today’s post we are going to discuss the mistakes that every trader should avoid while investing.
1. Lack of Preparation
A major part of trading is preparing to trade.
If you want to succeed at trading, you must become the strictest and the hardest boss you’ll ever have in your life and this is you.And you also need to be your boss’s hardest-working student and employee.
It takes discipline which many out there can’t handle. They’re not ready to sacrifice time and effort but want their money to grow exponentially. How can you start?
- Create your watchlist.
- Go through your scans of the largest percentage gainers.
- Look at what patterns have and have not been working.
Now you know the drill, so do it, the more trading experience you gain, the more you’ll develop this automatic habit.
2. Letting Emotions Take Control of You
The financial markets are a perpetual battle between the bulls and the bears.
When a stock’s bulls outnumber the bears, the price goes up. When the bears are stronger than the bulls, the price goes down. And the same battle plays out in your mind, your heart, and your gut. It’s the constant push-pull of fear and greed.
That’s what leads you to make psychological trading mistakes:
- You let your emotions overrule your mind. You have to harness those emotions so they serve you.
- Greed is a good thing when it motivates you to work hard
- Fear is a good thing when it prevents you from practicing time tested bad strategies.
Stay in control. Use your due diligence so you always know when it’s useful to feel greedy and when it’s dangerous to ignore fear.
3. Not Keeping a Trading Journal:
When you think of trading, “journaling” isn’t something that usually comes to mind.
Do you ever note when you enter a trade and exit with a profit, then move on to the next trade? And most of you would answer this question as no.
The fact is you have to keep a journal of all your trades — the good, the bad, and the ugly.
- Take screenshots of the chart and the setup that you got you into each and every trade.
- Write down your thoughts on why you liked the chart and entered the trade.Then write down when you exited the trade.
- Study your entries, exits, and timing.
- Learn from your success and failures.
It’s one of the best ways to improve as a trader.
4. Ignoring Indicators
The technical indicators are telling you a story about the stock, and you can’t afford not to read what it’s saying.
- Buy breakouts and sell breakdowns.
- When the indicators tell you a trend is close to its top, take your profits. Get out of the trade.
- When the indicators tell you a stock is not ready to trade yet, stay away.
5. Trading Too Large Position Sizes
When you’re trading, always keep position size in mind. Don’t risk too much of your total trading account on any one trade!
You may love a chart and think the price will increase, but what you think doesn’t matter to the market. Use good judgment and proper risk management practices. Don’t pour all your money into one trade.
Test your trading strategies and rules with small position sizes. Make multiple trades of smaller quantities, to gauge your win rate. Once you know that, you can gradually increase your position size and refine your strategy along the way.
6. Trying to Aggressively Predict the Market
Attempting to time the market often has a negative impact on returns if one does not have the necessary knowledge. Timing the share market correctly is incredibly difficult and there are many biases at play when attempting to do so.
Even institutional investors do struggle to predict this correctly. Moreover, it is important to give your investments time to grow and let the power of compounding weave its magic.
7. Neglecting Stop Orders
A solid way to prevent excessive day trading losses and potentially lock in some profit when you have a winner is to make sure you set stops on every single trade.
If you stay glued to your trading screen, you might think you don’t need them. But sooner or later you’ll get distracted by another trade, the news, lunch, work, or even a sudden need to rush to the washroom 🙂
When a stock loses support and everybody wants to get out in a rush, it can fall a lot faster than you can get your sell order in. Stop loss prevents whipping of your profits and much more.
With ShareIndia Digital Trading Account, you can set bracket orders and cover orders with automated, trailing stop losses to smartly hedge your trades even before the entry position is traded.
8. Following Recommendations Blindly
When buying shares, inexperienced investors tend to follow any recommendation by supposed stock market “professionals”.
But an old exchange saying goes: “If the sparrows are already whistling it from the roofs, the stock is already too expensive.” In other words: If “the next big thing” is already in common folklore, it may really no longer be the golden egg you’re looking for.
9. Not Diversifying Risks
The concept is very clear, you never put all your eggs in one basket, it’s the most basic and strong way of risk management.
Different asset classes- gold, mutual funds, equity, debt- have different growth trajectories and risk tolerance. When you invest all your funds in just one market instrument alone, you expose your portfolio to a single pattern of risk. However, when you diversify your portfolio, you counterbalance the risk and loss by investing in other assets which are likely to perform better and deliver better returns.
It is often thought that a successful investor makes very frequent transactions. In reality, the investor does not trade as much. Conducting a few trades within which the investor is able to diversify his risk is the most optimal scenario.
We’re human and we all come with brains and nervous systems that didn’t evolve to make us perfect traders.
- But we can achieve this by learning the main patterns and recognizing them in a stock chart.
- Learning to follow trend lines. Buying breakouts and selling breakdowns.
- Learning from your mistakes by keeping a trading journal.
- Establishing the discipline of following your own trading plan.