Many novice and emerging stock traders charge full throttle into the markets with high profit expectations, but find out fairly quickly that making money consistently isn’t as easy as they expected. For some, this realization can be quite discouraging, particularly because there are few pursuits that fuel human emotion as significantly as trading. The prospects of making money often lure people into the trading arena, but the reality of losing money can be a quick deterrent.
“The wonderful thing about the stock market is that you always know when you’re right or wrong. If you’re losing money, then you’ve probably done something wrong. Eventually, if you learn not to repeat making the same errors, you’ll start running out of them.”
The following article takes a look at couple of most common mistakes made by active stock traders.
Little Preparation or Training
When you enter the market arena, you had better be prepared. However, few traders perform the necessary due diligence before moving headlong into the markets.
In order to trade, you have to know something about the markets. Mostly basically, you have to know that markets exist and which are the big ones. Beyond that, one has to know what drives the market. In each market, there are a few key news items or data points that can make or break the market.
Following the news / events across the world helps to understand what’s going on, know who some of the big players are and the main things moving the markets.
Being too Emotional about Money
Many traders have been losing money in stock markets due to their inability to control emotions, particularly fear and greed. People tend to make emotional decisions when things don’t go as planned. It’s natural to want to act on excitement or discomfort as quickly as possible. Making haste decisions might seem like the right thing to do, but if you forego rational decision-making in the process, the results could wind up far less than optimal.
Blindly following Mechanical Systems
After a series of winning trades people get overconfident and place more trades, which they are not supposed to be taken. They never make an analysis why they were on a winning streak. Was it the market or the system? Traders fail to recognize and make decisions based on basic of the technical parameters and as a result continue to lose capital when market goes sideways or in correction despite of following mechanical systems in discipline.
Don’t Jump right in… Think. Where will you buy? Where will you set your risk management? How much should you invest? When would you buy more?
Placing improper Stops
A sudden market collapse, an unexpected news release or the loss of your internet connection can happen at any minute. Be prepared by having a fixed stop loss in place. See the trapeze artist; can they succeed without the safety net? Trading is like trapeze act and stop loss acts as safety net. In case of a fall, it will protect you from fatality and broken bones; meaning a total capital wipe out or a huge loss. With manageable losses one can get into next trade with a positive feeling.
Doing the consensus trades or Following the Herd
One mistake young traders make is falling in love with consensus trades. If everybody loves the trade, it must be good right? 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.
Not focusing on your strengths
A common mistake most inexperience traders make is trading outside their comfort zone. Young traders have a little success trading stocks, and then decide they can also trade commodity or currency futures.
Stick to what works. Work really hard at what you are good at. That’s how you become great at something. 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 can be stable long-term at this. Focus on your strengths.
It’s common to hear about the victories people have trading stocks, but you rarely hear about the losses. As a result, it’s easy for emerging traders to get lulled into thinking that successful trading involves little more than knowing the ticker symbol of the latest idea from your neighbour, co-worker or buddy.
This list is not exhaustive, but it should give you a good idea of where this is going. Once you know yourself, you can identify your strengths and interests as a trader. Knowing those, you can prepare to trade the markets and strategy that will suit you the best.