People that buy and sell stocks can be classified into 2 categories depending on their frequency of buying and selling company stock – traders and investors. Traders tend to buy and sell securities quite often as compared to investors who tend to hold positions for longer periods sometimes extending to a few years. With that said, it’s important to know that trading between short period can result in mistakes that can completely drain out a new trader’s investing capital. Here’s few of the mistake that a rookie trader makes:
- Handling losses ineffectively
One of the traits of a successful trader that sets them apart from the competition is able to handle a small loss and move to the next trade idea. Unsuccessful traders get paranoid and anxious for the smallest of losses. Instead of capping the loss with a stop-loss they hold on to a losing position hoping that the stock will eventually surge. Such activity, when repeated constantly, can lead to a mounting of losses and eventual depletion of trading capital.
- Failing to execute Stop-Loss orders
Not implementing stop-loss orders could be one of the biggest mistakes made by a novice trader. Tight stop losses limit losses before they grow into sizeable ones. There may be a risk involved where the stop-loss order may be implemented at levels below the one specified. However, the benefits outweigh the risks.
- Not having a game plan
Experienced, successful traders always think two steps ahead. The intuitively know where to enter, where to exit, how much portion of their capital to invest in that trade, the threshold for the loss they are willing to endure, etc. Beginner traders will usually not have a trading plan and even if they know they will eventually overlook it if things don’t work out the way they want them to.
- Averaging up or down in order to redeem a losing position
Averaging down may not bother an investor who has parked his money in a blue-chip company and is planning to hold for the long-term but it may be detrimental to a trader who is dealing with more volatile securities. The biggest trading losses in history have been due to the fact that traders kept adding to a losing position and eventually were compelled to cut the position when the degree of loss made it extremely difficult to hold the position. Most traders will go short more often compared to traditional investors and hope to average up because the security is advancing instead of falling.
- Too much leverage
Leverage has its advantages but it could also pose a risk to you. That’s why they say Leverage is a double-edged sword. In the context of trading, on one hand, it could boost your profits on a trade, while on the other, it could worsen your loss. Traders may be fascinated by the amount of leverage they have, especially when it comes to forex trading but may soon have their trading capital destroyed in a flash.
- Trading too often
Overtrading can cause once amazing profits to turn into horrible losses. While experienced traders have realized that trading too often could pose a threat to their returns, new traders are unaware of it and usually tend to learn from reference experiences.
- Herd mentality
Another common trading mistake is that traders will likely the follow the herd without any second thoughts and as a result end up paying too much for a stock or park them money in securities that have dipped and might possibly turn around. Experienced traders, apart from being aware of trends are used to exiting trades when they get overly crowded.
- Neglecting homework
A lot of traders tend to not do their homework simple because it may be a hassle. If you’re an Indian trader, doing adequate research before a trade such as going through equity research reports in India before doing a trade. Beginner traders don’t possess the knowledge of seasonal trends, how different events affect stock prices, and intuitive trading patterns that a lot of experienced traders have.
- Trading between different markets
Beginners may tend to be less centered and oscillate between different markets such as stocks, options, futures, bonds, etc. This could great a lot of confusion for the trader and hinder him from excelling in any one particular market. Dealing with multiple markets should be done with some guidance from investment banking companies in India that will advise you on what investment vehicle could benefit you the most.