Here are some of the top trading mistakes that newbies make. If you are a trader or are thinking about trading, then you will want to avoid these common mistakes. Trading is much different than long-term investing, and your approach should differ too.
Lack of Planning
One of the most common mistakes that new traders tend to make is to attempt trading without having a plan. The markets are an extremely complex mechanism ruled by multi-billion-dollar investment firms. Simply attempting to walk in off the street and consistently make money over a long period of time is a suicide mission. You might get lucky here and there, but to be truly successful you will need a plan.
Books and tutorial videos can help. It is suggested that you read and watch as many of them as you can. You can also opt for formal training in the form of classes and seminars. You also need to be prepared to deep dive into every aspect of a company that you want to trade in. You’ll have to go deeper than the daily headlines and learn the ins and outs of a company, how it works, and where it is going.
Computers and trading software can be wonderful resources to help you trade, but don’t fall into the trap of relying too heavily on them. You need a firm understanding of how the charts, graphs, and trading signals that the software produces are being generated. Don’t simply let the software drive the car. You need to have some understanding of what’s under the hood.
A good practice is to do some mock or paper trading before you trade with real money. See if your plan and the research you have done is successful before putting up actual money.
Keeping a written journal of your trades is also a good idea. Not only should you have a written mission statement of your own personal goals, but you should keep a log of your past wins and losses. What things did you do right and wrong? How can use use these lessons to improve in the future? Keeping on track will help you avoid rumors, hot tips, and emotional trades.
Not Limiting Your Trades
Many new traders go “all in”, as YOLO tends to be the common battle cry on social media presently. But a smart trader will only invest as much as they can afford to lose on any given trade. Many experienced traders won’t invest more than 10% of their portfolio into any single security. Day traders often operate with less risk tolerance and may only put no more than 1% or 2% of their portfolio into a single trade.
Stick to your plan when executing trades. Only invest what you are comfortable with, and avoid emotional reactions when things get volatile. Many traders will set up a stop loss on their positions. This way the trader can dictate when a security will be bought and/or sold.
Being too Emotional
Money and peoples’ emotional connection to it is the cause of the failures of too many would be traders. For many, money represents safety and power. When a trade goes sideways an inexperienced trader may feel that their safety and power are slipping away. What happens next is usually an ill-advised trade that doesn’t line up with their original plan.
A truly seasoned trader won’t allow emotions to play a role in their long-term trading strategy. Whether they are making money or losing it, you won’t be able to tell the difference. They have a plan and are sticking to it. They also might not be looking at their overall portfolios every day.
A good practice is to start your trading in smaller amounts and slowly increase them over time. Starting small can help season you to loses or wins without reacting emotionally.
What proceeded are some of the top trading mistakes that newbies make. There are countless others, but with a plan you can come out ahead. Have a long-term plan, educate yourself, and learn to control your emotions, and you are much more likely to succeed in the complex world of trading.
Writer and Investor. Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.