Even before the Wolf of Wall Street became a sensation, people have been entering the world of stocks and shares, dreaming about a shortcut to a luxurious lifestyle.
However, it takes more than a few good trades and investments to skyrocket someone to success. It is more than a little bit difficult for a new trader to find solid ground. Yes, there are millions of people around the world, who are successfully trading each day.
While some of them are successful due to sheer luck, others are there due to extensive knowledge of the trends of the share market.
Irrespective of how long you have been trading, there are a few mistakes that always loom in the shadows.
1. Believing the “hot stock” leads
Getting your stock tips from trading company ads is one of the worst mistakes you can make. “Hot stock tips” from website advertisements and email campaigns are the biggest kind of hoaxes you can fall for during trading. Usually, amateur traders fall for these, but it is not very uncommon for an expert or two to try their luck by following the lead in a desperate attempt to make some quick dough.
In reality, these companies have already bought those shares/stocks low, and they need you to buy them to drive the prices up. It is all a huge sham to drive the prices of the shares up, so the company can later sell them at higher prices.
2. You are forcing trades
New traders force trades more often than we’d like to admit. Stock trading should depend on hardcore logic and mathematics. It is not an emotional decision or something you do base on intuition. Forcing trades can be one of the worst mistakes you are making.
Amateur traders usually land on a winning streak for a couple of hours or even days, but this usually precedes a long line of losses. The problem is – most newbie traders have no idea as to how to adjust to these losses. They jump at the most unlikely opportunities, and they end up making the same kind of “hot stock tip” mistakes in the hopes of making some quick profit.
The idea is to stay calm and start calculating. Do not be emotional about your losses. It is all part and parcel of the game. It takes quite a few losses to turn amateurs into pros.
3. You are not minimising your risks enough
People new to the stock market rarely ever think about minimising their risks. Even trading in penny stocks can be rewarding if you learn whatever there is to know about their share price history, behaviour in the market and future tendencies. Here are a few things ever amateur needs to remember before starting their first trade –
- Find out risk-reward ratios: This is similar to the cost to effect ratios in any decision you make in real life. Do not enter the gameplay unless you have significantly high chances of high reward percentages. Always set your entry and exit points depending on how much risk you are willing to take against the possibilities of a possible win.
- Get out before prices start plummeting: Understand your risk to reward ratio. If the rewards against the risk of investing in stock are not significantly high, you should always get out when you have time. This will, of course, mean getting out earlier than you should at times, but that is again better than risking thousands of “potentially negligible” probabilities of high profit.
- Position size to portfolio rule: If you wager over 70% of your portfolio in a single trade, you cannot blame anyone but yourself for a huge loss. It is terrible for your trading portfolio. You need to balance the trading size to your portfolio and play the game carefully to conserve resources for the future.
4. Trust the market, but only so much
Market promoters lie to drive up the prices of their stocks. This is especially true in case of penny stocks, and you need to know that before you start making your investments. Very few stocks are going to be the “next Apple” or the “next IBM”. So, when you buy the stocks in dozens listening to these kinds of adverts, you are automatically creating a huge possibility of dire failure.
It is alright to be new, but it is an unforgivable mistake to be naive while trading stocks. Do not listen to the stock promoters and the trading company adverts. Always keep your head above water while making your buying and selling decisions.
Just are just a few of the many mistakes almost all traders have made at least once in their lifetimes. Making a mistake does not mean your trading career will never take off or that you will never be able to make a living out of trading stocks. It simply means that you are still in the beginning phase of your learning curve and you need to buckle up for a steep ride ahead.