scorecardresearchCommon trading mistakes that prevent us from earning profits and minimising losses

Common trading mistakes that prevent us from earning profits and minimising losses

Updated: 25 Feb 2022, 12:09 PM IST
TL;DR.

The stock market belongs to none. Be detached and conscious of your moves to be successful.

Stock market movement

Stock market movement

There is no perfect recipe for success in a stock market. However, following some basic guiding principles can ease our stock market trading and investment journey that otherwise seems too complex and convoluted. While the inherent risk factor cannot be completely done away with, some trading mistakes can simply ruin your chances of earning from the stock market.

  • Lack of research: Remember the days when you got pulled by your ears at school for not doing your homework? The stock market is a teacher that throws lessons at you while testing your skills and patience. Many investors new in the market do not verify companies’ fundamentals nor pay attention to the necessary technical before buying shares. Lack of research about companies, ignoring the latest company updates, or disregarding trading patterns is attributed to failure and extreme losses. The urge to buy and sell shares overpowers the need to carry out necessary research at the beginning of the trading journey.
  • Working without a plan: You must have a plan in place for everything. Be it swimming or trading in shares, you must learn the tricks of the trade and decide how you want to go about it. Ask any successful trader, and he or she will tell you how a well-chalked-out strategy helped him or her remain ahead of the race. Of course, external circumstances can be unnerving, but a planned investment means shielding yourself away from avoidable losses that cause you to lose your capital.

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  • Relying on financial media: Rely on none, especially, the financial media channels that will advise you to the extent that serves their purpose. Most news we see on television are 12-15 hours old, which means that they are not based on market updates, and hence, will do no good in helping you reach your goals. Instead, subscribe to daily or monthly newsletters to read and educate yourself. Remember that no one on television is there to tell you the tricks of the trade. No one can help you unless you learn to help yourself.
  • Inability to leverage: The biggest blunder that some people make is to take loans for investments. The idea that they would buy shares at less prices and sell them at high causes many to suffer losses as they are not aware of the entry and exit points in the market. Many beginners are blinded by the profits that their friends and peers earn, thus, neglecting the concept of leverage. The phrase “Leverage is a double-edged sword” is unknown to many. Abandoning the need to understand basic concepts as these cause many to lose the money they put in the market.
  • Not applying stop loss: The market can go up and down due to many reasons. Many novice traders go with the flow and do not implement “stop loss” orders. The instructions regarding “stop loss” orders are given to a broker buying and selling securities to cap the losses caused. Stop losses are much needed for successful trading and not implementing those can result in an unprecedented loss of capital.
  • Continued averaging down: Most traders get into the “panic buying” mode when the market goes down. They add more shares, when they are abysmally low, to their portfolios to break even their losses. However, this tendency to average down eventually causes them to give up their portfolios when they are unable to bear further losses.
  • Following the herd: The herd mentality is so pervasive and incurable that it takes repeated experiences of losses to be cured of it. Many novice traders while starting on their journeys fall into the trap of following the advice of social media influencers pretending to be stock market experts. These influencers trick investors into buying shares at a certain price and wait till the latter purchase the shares in high volumes. The prices of the shares go up inadvertently, which is when they sell their shares all at once. Following this so-called “Pump and Dump” scheme, many investors have lost their hard-earned money in the market.
  • Accumulating losses: Many traders hold on to their shares even when they are suffering from losses hoping that the stock prices would go up one day, thus, helping them to recover their lost money. Showing affinity to shares or stocks can breed sorrow. The stock market is partial to none and works with an objective approach. Sticking to a position instead of deciding to move on to the next position during the next trade session will only result in incurring further losses. Adopting risk management strategies is of utmost importance. This you can do by putting a cap on your small losses.
  • Getting bolder and bigger: Vanity gets the better out of most in this market. New traders being able to earn a few thousand bucks from the first few trades think of taking bigger and bolder risks in their next trades. Trading is not child’s play; it is a precursor to investing for a long time and, hence, must be treated seriously. You must be mindful of the decisions that you make. Every “buy or sell” decision that you make must be backed by adequate research regarding the company’s fundamentals and external environmental factors that may have a bearing on the market.

First Published: 25 Feb 2022, 10:39 AM IST