Common mistakes to avoid while trading
Traders are human and we all make mistakes. However, successful traders learn from their mistakes and capitalize from their experience using their next opportunity. Many of the items listed below are obvious but not known by novice investors and can be forgotten by experienced traders.
Here are some common mistakes to avoid when trading:
Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin). Learn to size your positions correctly so that you never risk more than 2% of your trading capital on any one trade.
Averaging down: Placing good money after bad is a loser’s game. Only add to winning trades. Never add to losers!
Listening to rumours: Forget the talking heads, rumours and tips as they are nothing but garbage and a sure way to substantial losses. Tips are for waiters!
Lack of patience: It takes years to master trading as an advanced skill. Even then, you are never done learning or adapting to different market conditions.
Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade. Never allow emotions to make this decision.
Trading illiquid shares: When trading actively, ensure that you play in stocks where there is a lot of activity. Trading in illiquid shares can make it difficult to sell when you need to, and that could not only cost you more money than you’re comfortable risking, but it also creates opportunity cost if you cannot exit one trade to jump aboard the next one.
Buying 52 week lows: Don’t be afraid to buy stocks that are making new highs. The garbage sits at the bottom along with weakness and downward momentum. Buy strength and the momentum moving higher.
Pure fundamentalist: technical analysis is a must! Use candlestick charts that show the price, volume and major moving averages. This is all you need. Don’t complicate the process.
Making trading decisions based on taxes: Never buy or sell bases on taxes alone. We all have to pay tax. Don’t fight the system. Accept that you have to pay taxes, and pay them. Don’t allow this to interfere with your ability to think clearly when making trading decisions.
Buying based on dividends: Don’t buy solely based on dividends. Most growth stocks don’t pay dividends.
Lack of action: Be able to move on a dime. Time is money. Don’t procrastinate or hope for something that may never happen.
Lack of consistency: Develop a method that is suited to your personality. Stick to it, and don’t trade blindly.
Impulsive decisions: Preparation is vital to every trade. Do no act impulsively. Ideally, you should do all your analysis outside of market hours, so that you know exactly how to react when the market presents an opportunity.
Lack of ability to control emotions: Stick to your trading rules. Rules eliminate emotions.
The secret to winning big in the market is not to be right all the time, but to lose the least amount of money possible when you are wrong. As long as you win larger than you lose, you will become a consistent winner over time.