We’re all humans, and it is generic for us to make mistakes. While trading stocks, either we are emotionally driven, especially with greed and fear, or keep very high-profit expectations. Either way, we 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. The prospects of making money lure people into this trading arena, but the reality of losing money can be a quick deterrent and discouraging. Therefore, as investors, you must learn that making mistakes is obvious. Even the 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.
Dr Alexander Elder, in his book “Come into My Trading Room”, very rightly mentioned, “It’s all right to make mistakes”. If you aren’t making mistakes, you aren’t learning. But it’s unacceptable to repeat those mistakes. The wonderful thing about the stock market trading 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 will give you a glimpse of the five most common mistakes made during stock trading.
1. Lack of Preparation
Trading stocks is not a school-going job. To succeed in trading, you must become disciplined and must do your daily research. You have to create your watchlist and track the same at every time and allocate your money in different stocks in a systematic manner to earn good returns. It is quite a drill, but with experience comes precision, and slowly it becomes a habit. If you are looking out for quick earnings, the stock market is the riskiest arena.
Every trade needs to be disciplined, thought about and not impulsive. As investors, it becomes essential to carry out a basic fundamental and statistical analysis rather than going with your experience, emotions, and gut. Such an action only shows how ill-prepared are you for that particular trade.
2. Buying Stocks Without a Plan
If the price starts moving against them, some traders let their emotions take over. They find reasons to convince themselves that the stock price will increase, making them reluctant to sell even when the price drops. In other cases, many times greed takes over new traders when they see the stock price increase. Soon enough, the trade moves against them, and they also start suffering losses. These trading mistakes are the result of not having a proper plan before moving into a trade.
Therefore, as investors, it becomes important to answer certain questions to set a plan with proper entry and exit points while making a trade, like:
* How am I analyzing a technical chart of a company or its macro-economic conditions?
* What are my price targets, both for high and low?
* What is my risk appetite?
* At what point will this trade move against me? …and so on.
3. Not Cutting Losses Quickly
This mistake is very common, a typical human failing. You will never be correct on your trades. A lot many traders simply refuse to admit their mistakes. But, as a trader, you can’t afford that. You have to admit whenever you made a quick exit or stayed for long with a particular trade. At the same time, you need to predetermine your risk by answering questions like:
* What is the ratio of risk to reward?
* How much risk are you willing to take?
* When to enter the trade and set your stop-loss? …and so on.
Setting a stop-loss immediately after entering a trade will protect you from incurring huge losses as a trader.
4. Trading Difficult and Unclear Patterns
Most brilliant stock investors also fail to understand the different patterns reflected in different types of graphs and charts. On top of this, many investors also fall in the traps of brokers and account managers.
To succeed in stock trading, an investor must make it clear that he will have to work hard and carry out his research before taking a particular decision. Don’t pump your cash in one basket only because someone else recommended you to do so. Always maintain a diverse basket of stocks. Performing an analysis of the market on a self basis will provide a deeper picture inside the mind of the market. Initially, these patterns might seem to be unclear and confusing but read and understand the same. The more you do so, the better becomes your decision making.
5. Letting Emotions Take Control of You
Financial markets are a perpetual battle between the bulls and the bears. Apart from the highs and lows, an investor also has to battle with his/her mind, heart, emotions, and gut. It’s the constant push-pull of fear and greed. That’s what pushes them towards psychological trading mistakes. Greed is a good thing when it motivates you to work hard and learn while fear is a good thing when it prevents you from putting on stupid sure-loser trades. However, decision-making must be done after a thorough analysis and our emotions must always be under our control.
First, learn to do the fundamental macro analysis of the company, slowly making your hands dirty with the main chart patterns and technical know-how. Learn to follow trend lines. Buy breakouts and sell breakdowns. Only then will you be able to establish the discipline of following your trading plan and take apt decisions. Your brain must control your trades and not your emotions.
It is common to hear about the winnings while trading stocks, but rarely will you hear about the losses. As a result, emerging traders get lulled into thinking that successful trading involves little knowledge. At Wealthface, we always advise others about the complicated and challenging ongoing commitment that trading involves. You have to constantly study your craft, looking for an additional edge that may help you to make more informed decisions.
We’ll say it again, “We’re humans, and we all come with brains and nervous systems that didn’t evolve to make us perfect traders. We all have cognitive biases. Do your research and practice to learn. Don’t let your emotions overturn your trading knowledge. Be honest with yourself; your financial future is at stake here. Start your discipline regime now.”