Trading stocks is a great way to earn some extra cash on the side or even earn enough to retire at an early age. But there is a high likelihood that you aren’t going to earn anything or even lose all your investment. Many people will blame luck or an unpredictable market for their losses. Yet, in reality, there are many mistakes that can lead to a negative trading portfolio. Let’s take a look at some of these common mistakes that you should avoid at all costs.
Not understanding the business:
You wouldn’t directly invest in a new business that you know nothing about, then why do it when purchasing stocks? Don’t just find the best stocks to buy and invest all your money into them. No matter what, only invest in companies whose business model you understand and trust. There have been many disasters where investors pumped billions of dollars into companies with flashy marketing and vast promises. Only to realize later that that company was just a scam and had no tangible business model.
Letting your emotions get in the way:
Complex emotions are one of those traits that every human possesses to some degree. They define a lot of our day-to-day decisions. We decide what to eat for dinner not on the basis of what’s the best food in terms of calories and cost, but based on what we want to eat and what will make us happy. Leave these emotions when trading.
You should not get attached to a company on an emotional level. Maybe that particular stock made you rich in the past, but now that it is plummeting, sell it as soon as you can. Don’t hold onto it because you don’t “want to” and focus on what you “need to” do.
Putting all your eggs in one basket:
Every experienced investor will tell you one thing, never invest everything in stock. A good rule of thumb is to put a maximum of ten percent in any one particular stock. This way, even if you fail to predict the correct market direction for one specific stock, you still have that ninety percent to fall back on and recover your losses. Similarly, investing in both long-term dividend-paying stocks and quick-sell stocks is a great way to ensure that you get the best side of both.
Newcomers might think that day trading (moving in and out of trades in hours or even minutes) is a great strategy for getting rich. After all, all of the movies and T.V shows depict these fast traders as Millionaires with cruise ships and mansions. The reality, however, is completely different. Statistics show that a significant majority of day traders completely lose their money. There are less than one percent day traders in this world that make a consistent profit throughout the year, and less than fifteen percent that make a profit at all.
Unless you are a major hedge fund manager, the transaction costs alone will eat up any profits that you make and will pile on top of your losses. The other thing that prevents most people from earning profits in day trading is their experience. To an inexperienced person, day-trading is nothing more than fast-paced gambling.
Not having a trading plan:
Every experienced trader enters the market with a concrete plan. They know where their entry point is going to be, how much capital they’re going to invest, which stocks they want to target, and what their exit points will be. This organized approach to trading is proven to be highly effective.
Beginner traders make the mistake of not having a definitive trading plan. They just hop on the market and then decide what they’re going to do. Even if they have a plan, they tend to deviate from it relatively quickly. This lack of discipline hurts new traders more than they realize.
Mistakes are a part of being a human. Everyone makes them from time to time, and even the million-dollar hedge fund managers aren’t immune to making glaring trading mistakes. Although we can’t one hundred percent avoid them, we can try to minimize them to an extent where they don’t really matter in the long run.
Forming a complete trading plan, diversifying your portfolio, not getting emotionally attached to a specific stock, and doing proper research are all ways to reduce your trading mistakes to a minimum and start your journey towards making some profit.