‘Trading is a business activity like any other business’; once you absorb this reality, a lot of the fear and stigma around trading will dissipate, and so would the many mistakes which a novice trader usually makes. Every business requires one to follow certain specific rules and guidelines in order to be successful and conduct the business in a professional manner.
The following are a few common mistakes one should avoid while trading in the stock market.
Herd mentality: As clichéd as it may sound, this continues to be the number one pitfall a trader falls victim to. Thus, avoid trading decisions based on news, tips, and a much talked about and published idea or a recommendation on social media. Once prices have rallied or gone up substantially, the positive news or talks get discounted by price. Take your own informed decision backed by sound logic and educated approach.
Failure at style identification: Clearly distinguishing between trading (and the various styles) and investing is the key to a sustained tenor in the market. Avoid taking investment decisions based on trading information and vice-versa. Identifying duration of holding (across swing, intraday, positional, long-term) is key to maintaining a green P&L
Lack of patience: A slow and steady approach will result in desired success in the long run. Keep your expectation of return at realistic level, and don’t have a gambler’s mindset.
Overtrading: Overtrading is getting in and out of trades very frequently. Therefore, know the limits and number of trades which are considered appropriate as per the style of trading you have selected. For a day trader, more than three trades in a day will be considered overtrading. For a swing trader, more than three trades in a week will be considered overtrading, while for a positional trader, more than three trades in a month will be considered overtrading.
Not having a trade plan: A vast majority of the traders lose money because they don’t have a trading plan. Every trader should have a trade plan which defines the rules of entry, exit, as well as the rules for risk management and position sizing.
Letting your emotions rule: The saying is true that fear and greed rule the market. Traders should not let the emotions of fear and greed control their trading decisions.
Leverage: Avoid taking leverage without having strong understanding and knowledge of the instrument you trade in, like for instance, futures and options. Futures and options are leverage instruments, and a few losing trades can reduce your capital substantially.
Failure to identify the right sources: We live in the golden age of communication, and even though that has grossly benefitted us, it also comes with its own pitfalls. Investing and trading is all about accessing and evaluating the information to the best of your knowledge as a trader and/or investor. With an overload of information today, your job is to identify those sources that resonate with you from a risk vs reward standpoint and veracity and legitimacy.
Leaping unprepared: Markets are extremely dynamic in nature, and with information and education, practicing in a live market is the key to building proficiency and tenor. Use simulators and/or sand-boxes in abundance to build your confidence, get feedback on your conceptual understanding, and accordingly, prepare for the world of stocks.
The author is the founder and CEO of Finlearn Academy
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)