What are the common mistakes made by investors ?
Stock market trading often seems complicated and risky. This isn’t entirely true. It is a serious commitment which needs focus, nurturing and constant updating of knowledge. We usually come across several stories of how a person made a fortune or was brought to the streets due to bad investment decisions. Whether you are experienced or new to stock market trading, here’s a concise list of 10 trading mistakes to avoid for long term success.
1. Ignoring Your Homework: One cannot emphasize enough on the importance of doing their homework, i.e. research. As a trader, the worst mistake made is not researching enough. This is necessary as novice traders have neither the knowledge nor experience of seasonal trends, timing of data releases; and trading patterns that occur in the trade circle. The urgency to start trading often blinds the need to do some research at the beginning and that can cost a very high price.
2. Straying From Your Trading Plan or Not Planning At All: Starting your trade without adequate knowledge of the stock market is just like diving into quicksand headfirst, something which results in drowning. Successful traders always have a well-defined plan to trade, which they do not stray from. For example, how much capital they are willing to put at stake, the losses they can afford to bear, their entry and exit points in the market, etc.
3. Having Too Much Faith in Financial Media: None of the financial media based channels can help you get closer to your goals. Beginners often assume that financial media is the way to go in order to keep a track and learn more about their investments, which is often contradictory. Nobody would reveal how to invest in a stock market on a TV channel if they actually were profitable. Refer to daily or monthly newsletters, which is way more productive and educational.
4. Not Minding What or How You Leverage: Leverage is the strategy of using borrowed money to increase return on an investment. Beginners are often jazzed by how much leverage they possess but don’t understand the phrase “leverage is a double-edged sword” till they learn it the hard way. Leverage is known to increase profits exponentially and diminish your capital to mere pennies through losses.
5. Not Implementing Stop Loss Orders: Stop loss orders are the instructions given to a broker for buying or selling securities in order to cap the losses caused. Stop losses are important for successful trading and not implementing these can be one of the biggest mistakes a novice trader can make. To learn more about stop loss, refer to our blog ‘Importance of Setting Stop Losses.
6. Averaging to Recover Losses: Some of the biggest trading disasters can occur when a trader keeps on adding stocks to break even his losses. This sort of averaging down eventually forces him to give up his entire position when the losses incurred makes it imprudent and impossible to hold on to that position. Traders also average up because the security advancing is equally tempting but at the same time, it carries high risks.
7. Becoming a Part of the Sheeple: Traders usually fall into the trap of following the herd when it comes to investing. They end up paying a price too high for hot stocks or initiate short positions for drowning stocks. They don’t usually understand when to exit a trade. We at Indira Trade provide one-stop stock market investment advice and help you to trade better as well as maximize profits.
8. Obsessing Over Performance: The desire to make better investments and doing better in the market grips almost everyone. Traders often fall into the trap of high performing stocks without knowing that the reason behind such high performance. Sometimes you see a rise in stock prices due to the effect of the trade cycle. Once this trade cycle comes to an end, the stocks will show a downside. Hence, it is advisable to stick to your investment plan and improve your long term trend following system rather than obsess over performance. You can also refer to our blog “How to Overcome the Fear of Investing in the Stock Market” for help.
9. Letting Your Losses Accumulate: It is a general tendency of traders to hold on to a losing position in the hope that the stock prices will move up in future. They stick to their position rather than moving on to the next trade decision. This separates unseasoned traders from the experienced. The latter would exercise risk management strategies and put a cap on small losses.
10. Overconfidence Leads to One’s Downfall: A novice getting hit by beginner’s luck may get bolder and take bigger risks and then fail royally. What one needs to understand here is that trading is a very serious occupation and needs constant attention. Always be conscious of your decisions by remaining emotionally detached from success or failures.
Stock trading doesn’t need its participants to be financial gurus. Regular research and help from expert blogs or journals can turn anyone into a well-balanced player. By avoiding mistakes one has better chances of thriving as well as being successful in the stock market. Good luck and happy trading!