This guide outlines how to avoid the most common mistakes in trading that result in investment losses.
Professional traders are very cautious about their actions. They never take random steps to earn more money. They know very well that trading is one of the most sophisticated professions globally, and to make a consistent profit, they have to follow some fixed sets of rules to prevent mistakes in trading.
Without following those rules, it becomes tough for retail traders to ensure the safety of their capital. No one can survive in the long run without avoiding mistakes in trading in a structured way.
Rules to avoid mistakes in trading
There are countless tips and ideas to help you improve your trading performance and lose less. We will give you some fantastic tips by which you can avoid the most common mistakes in the investment business. Follow the information in this guide to become much more confident as a trader.
Know your weakness
Before you start taking trades in the retail stock market, you need to know about your weak points to avoid mistakes in trading. Without knowing your weakness, you will never be able to take specific future steps confidently. Most retail traders start trading with considerable sums of money, and they keep on making the same mistakes.
On the contrary, intelligent individuals know their weaknesses and work hard to find a fix. Once they start overcoming their faults, they slowly become a skilled trader in the stock market.
Know your goals
The majority of the retail traders are trading the stock market without having any specific goals. It is one of the core reasons the success rate is so low in the stock market and many investors are making mistakes in trading. If you intend to trade the US stocks (米国株) in Japan, we strongly recommend that you set up your goals in a rational way.
By doing so, you will know how much money you can lose and how much profit should be made from a specific trade. It will help you to improve your risk management skills and let you find the quality trade signals.
Avoid taking shortcuts
No one should ever take any shortcut in the investment business. Taking shortcuts in the retail trading industry is more like running on the edge of a wall and a clear risk of making mistakes in trading moves. Even if you succeed in winning a big trade, you are going to lose your entire trading capital in the long term.
Think of your trading career as a business and likewise stick to a long-term plan. Once you systematically trade the market, you will become highly skilled in the risk assessment sector. Eventually, you will know what it takes to protect your trading capital.
Stop using high leverage.
The rookie traders always search for the high leverage trading account. To them, a leverage trading account is the only way by which they can maximize their profit. However, professional traders are very cautious about their leverage because of the potential for mistakes in trading.
Though leverage gives you insane buying and selling power, it also increases the risk exponentially. For the safety of your trading capital, it would be wise not to use more than the 1:10 leverage factor. Even if you use a high leverage account, make sure you have firm control over your emotions.
Control your emotions
Learning to control your emotions is going to be a tough challenge in the retail trading industry. You might be wondering if controlling emotions is an easy task. Trade the market with a small capital and see what happens to your rules after losing with mistakes in trading.
You will be breaking the basic rules and recovering the losses with aggressive trades, which can blow up your trading account. Learned to keep your emotions under control, or else you should not consider yourself a professional stock trader.
The most common mistakes in trading
Buying shares in a company you don’t understand
Very often, investors gravitate around the latest “hot” or sophisticated sector. They may know very little, or even nothing, about technology, or biotechnology, or the specific business in which the company is involved which is a recipe for mistakes in trading.
Of course, that doesn’t stop them from trying to jump to what they expect to be the next profitable train. In this scenario, the investor is forgetting all the advantages and benefits he would have over investors who know little about the sector itself.
When you understand a business, you have a natural advantage over most other investors. For example, if you run a restaurant, you will be in tune with the companies involved with the restaurant franchise.
You will also see firsthand (and before they become public knowledge) customer habits. By extension, you will know if the sector is growing, slowing down or cooling, long before the vast majority of investors to avoid mistakes in trading.
To take our scenario a step further, when seeing the trends of the industry in which you are involved, you should be able to identify some opportunities to make big investment decisions. First-hand knowledge, it seems, can mean investment profits (or avoid losses).
When you invest in a company that is “above your knowledge level”, you may not understand the subtleties and complexity of the business in question and thus make mistakes in trading. This is not to say that you need to be a gold miner to invest in gold mining companies, or a doctor to invest in health, but it certainly wouldn’t hurt!
Whenever you can have an unfair advantage over most investors, you should put pressure on that advantage as much as you can to avoid mistakes in trading. If you are a lawyer, you should know when to invest in companies that generate revenue through litigation. If you are a surgeon, you will have a better understanding of how well (or bad) a surgical robot is performing its task and, as such, can have internal control over the performance of the underlying stock.
Expecting a lot from the stock
This is especially true when it comes to penny stocks. Most people treat stocks at low prices such as lottery tickets and predict that they can turn their $500 or $2,000 into a small fortune, and this leads to very common mistakes in trading.
Of course, this may sometimes be true, but it is not an appropriate attitude when you are starting to invest. You need to be realistic about what you expect from the performance of the actions, to avoid mistakes in trading — even if these numbers are much more boring and mundane than the absurd levels you expect.
Observe inventory performance up to this point. In addition, look at all other investments that are competitors in the same sector. Historically, did the underlying investment gain 5% or 10% per year, or were these changes closer to hundreds of percentages? Do most companies in the sector see their shares moving 1% at a time or is it more common for them to jump tens of percentages?
Based on the previous performance, although it is not indicative of what may be coming, you may have an idea of the volatility and trading activity of the underlying shares. Normally, an action will continue to act mainly as in the past and will normally be aligned with the general industry.
Using money you can’t afford the risk
You would be surprised if you could see how your trading style becomes different when you are using money that cannot take the risk. Your emotions get intense, your stress level rises to heights and you make mistakes in trading with buying and selling decisions that you would otherwise never have made. An old proverb says that “you will end up losing every dollar you bet on.” You should never put yourself in a high-pressure situation where you are investing money you need for other reasons.
The first thought is to invest only in speculative actions with ‘risk money’. However, we can take a step further and suggest that you do not even use real money when you are starting out. Consider paper trading, which does not pose risks and does not require any kind of money. Thus, when you get good at paper trading, you can migrate to real money trading.
By investing with money you can risk, you will make much more relaxed trading decisions and avoid mistakes in trading. Generally, you will have much more success with your business, which will not be driven by negative emotions or fear.
Motivation by impatience
We may have touched on the different emotions you may feel when you are investing, but one of the most expensive is impatience. Remember that stocks are shares of a particular company – companies operate much slower than most of us would like to see, or even than most of us would expect.
When management presents a new strategy, it can take many months, if not several years, for this new approach to start working. Very often, investors buy shares and then immediately expect the shares to act in their best interest: one of the common mistakes in trading.
This completely ignores the much more realistic timeline under which companies operate. In general, actions will take much longer to make the movements you expect or anticipate. When people get involved for the first time with company shares, they should not allow impatience to take over them … or their portfolio!
Learning about which stocks to buy in the wrong places
This is an extremely important point to avoid mistakes in trading. There is no shortage of so-called experts who are willing to give their opinions, while lulling them and presenting them as if they were polite and infinitely correct knowledge.
One of the most important parts to invest well and prevent mistakes in trading is to identify and isolate sources of guidance that help you make profits consistently. For every good information that can be beneficial, you will probably see hundreds of really horrible guidelines.
Always remember that just because someone is being highlighted or interviewed by the cutting-edge media does not mean that they know what they are talking about. And in fact, even if they have a stellar understanding of your topic, that still doesn’t mean they’ll be right.
Therefore, your job as an investor is to evaluate which sources of information should be reliable and have demonstrated a reliable and continuous trend of wisdom. After identifying the individuals or services that can generate profits, you should still rely only partially on your thoughts – combine them with your own due diligence and opinions to build your business decisions.
If you hear about a free action, especially a low-cost action, it is almost certain that it is being conducted by players with significant hidden motivations. This may not be true if you hear about a professional’s opinion about something like CNBC, but it is absolutely and not categorically true when you hear about the latest “hot currency upstock” that will burst (according to greedy prosecutors).
There is an endless line of rogue action promoters out there. Their obsession is finding ways to profit from their actions … you lose, so they can win. The downside is that for them to profit, you will probably need to lose. Investing in speculative stocks is mainly a zero-sum game, which means that for someone to win a dollar, someone else will have to lose a dollar.
That’s why artists and scam promoters try so hard to increase useless actions. The more money they get to push stock prices up, the greater the profit they will make when they move away and leave everyone eating dust … and breaking down with their mistakes in trading.
Following the crowd
In many cases, most people only hear about an investment when it has already performed well. If certain types of stocks double or triple in price, the mainstream media tends to cover this movement and tell everyone about how shares are quoted.
Unfortunately, when the media tends to get involved with a story about stock appreciation, it is usually after stocks have reached their peak. Investment is overvalued at this point, and media coverage arrives late in the game. Regardless, television, newspaper, internet and radio coverage pushes stocks even further into the overvalued territory.
We saw this trend manifest recently with recreational marijuana stocks. Some of these small companies had only two or three employees, but that didn’t stop them from being valued at a corporate value of about half a billion dollars!
In other cases, an almost extinct old gold mine would add ‘cannabis’ or ‘marijuana’ to its company name, and the shares would instantly double or triple in price. At no time did investors examine the company in sufficient depth to realize all the problems; tens of millions of dollars in debt; no revenue; millions in continuous losses each month.
‘Doubling down’ mistakes in trading
The average reduction is usually used by investors who have already made mistakes in trading and need to cover the mistakes. For example, if they bought the shares at $3.50 and it drops to $1.75, they can make this mistake look a little less terrible by buying a lot more shares for this new lower price.
The result is that now they bought shares for $3.50 and more for $1.75, so their average price per share is much lower. This makes the loss in shares seem much smaller.
However, what is really happening is that the individual bought a stock that fell in value, and now they are investing even more money in this lost operation. That’s why some analysts suggest that reducing the average is just throwing good money after bad.
The average reduction is usually used as a crutch to help investors cover the mistake they have already made. A more effective strategy is to increase the average, in which you buy more shares as soon as they begin to move in the direction you are anticipating. Stock price activity is confirming that you have made a good purchase option.
Doing little due diligence
To do due diligence, especially with highly speculative and volatile penny stock stocks, a significant amount of work is needed. The more diligence you perform, the better the results of your investment will be and the less likely you are to make mistakes in trading.
If you observe all the warning signs and all aspects of a company, you are much less likely to be surprised by any individual event that affects the business. When you see the potential risks and feel confident in all aspects of the company you are examining, you are about to perform due diligence.
The vast majority of investors don’t even come close to doing enough diligence in the companies in which they invest. Most people just want to find a company that seems to make sense and that should increase value due to the underlying industry (at least in their mind) is “promising”.
For example, electric cars will become a big deal soon, so people can assume that investing in an electric car stock is a good idea. Unfortunately, to be a good investor it takes much more than simple superficial considerations and superficial logic.
Investing based on a single concept
Most investors don’t even realize they’re doing this, but they will often believe that ‘this and that’ is a good idea and, therefore, the stock price will increase. If investing were so simple, we would all be very rich.
Yes, curing cancer is a great idea. Yes, generating municipal revenues through the sale of marijuana seems logical. Unfortunately, it takes much more than a simple good idea for the shares to be a good investment.
Instead, to prevent these mistakes in trading. look for a good concept, but focus only on the highest quality companies within this space. They should have increasing revenues, increase market share and proven management teams.
Conclusion
Ideally, you should not make many of these common mistakes in trading. However, the fact of the matter is that most investors, in most cases, will always make some of the mistakes we discussed in the article above again.
Fortunately, you can use your losses and mistakes to learn how to avoid them next time. In fact, most people learn more from their losses than from their earnings.
With enough time and a sufficient number of bad trades, you will be in a much larger (and more profitable) situation. Ideally, you will eliminate common mistakes quickly enough that you still have a large part of your portfolio on the other side. So, with your new ‘improved’ wisdom, you should be able to start making some profits!
Take your time and demo trade the market for a few months. Learn to execute the trades based on logic and walk away from your trading platform when you get emotional.
