Common Trading Mistakes

Making mistakes is an integral aspect of the learning curve in trading and investing. Investors primarily engage in extended holdings, dealing with forex, stocks, and various securities. Here are some common mistakes that traders make.

LACKING A TRADING PLAN

Experienced traders enter trades with a clear strategy, outlining precise entry and exit points, capital allocation, and maximum acceptable loss. 

On the other hand, novice traders often lack a predefined plan when they start trading. Even if they have one, they are more likely to deviate from it than seasoned traders, and they might even completely change their approach. For instance, they could shift from buying to shorting securities due to declining prices, leading to unexpected losses.

PURSUING STRONG PERFORMANCE

Numerous traders opt for asset classes, strategies, managers, and funds based on their current robust performance. The sensation of “missing out on excellent returns” has likely prompted more poor trading choices than any other factor.

When a specific asset class, strategy, or fund has demonstrated exceptional performance over three or four years, one fact is undeniable: the opportune investment window was three or four years ago. Nonetheless, the cycle that propelled this impressive performance might be approaching its conclusion. Savvy investors withdraw, while less informed participants enter the market.

DISREGARDING YOUR TENDENCY TO AVOID RISK.

Keep in mind your ability and willingness to bear risk. Volatility and fluctuations in the stock market or speculative trades might not suit all investors. Some prefer stable interest income, opting for secure blue-chip stocks, avoiding the volatility of startups.

Remember, risk accompanies any investment return. US Treasury bonds are the safest; other investments offer higher returns with increased risk. Assess potential losses for attractive returns. Invest within your means to avoid overexposure.

NOT USING STOP-LOSS ORDERS

A clear indication of a lack of a trading plan emerges when you neglect the utilization of stop-loss orders. These orders, available in various forms, curtail potential losses resulting from unfavorable stock or market conditions shifts. Upon meeting predetermined criteria, these orders execute automatically.

Opting for tight stop losses essentially confines losses before they escalate. Yet, it’s important to acknowledge the possibility of a stop order for long positions being enacted at levels lower than intended, particularly if a security experiences a sudden downward gap—akin to the Flash Crash incident. Despite this concern, the advantages of stop orders far outweigh the risk of exiting at an unintended price.

A related misstep occurs when you cancel a stop order on a losing trade before it triggers, often driven by the belief that the price trend will reverse.

RECOGNIZING THE SIGNIFICANCE OF EMBRACING LOSS

Frequently, investors neglect the fundamental truth that, like even the most skilled investors, they are human and susceptible to errors. The best course of action is acceptance, whether due to impulsive stock purchases or a sudden decline in a previously profitable asset. 

The gravest mistake is allowing pride to override financial prudence, holding onto a losing investment, or worse, purchasing more shares due to the lowered price.

This blunder is prevalent, often driven by comparing the current asset price to its 52-week high. Many who use this metric assume that a decreased share price equals a favorable opportunity. Yet, there exists a rationale behind the drop in price, requiring your analysis to comprehend its underlying causes.

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