Many novices in stock trading charge at supersonic speed, targeting high profits, but discover pretty fast that making profit consistently is never easy. For some, this discovery is very discouraging because they are likely to have suffered severe losses and opt to walk away from stock markets.
The truth about some of the top stock traders we know of today is that they made mistakes before getting to the revered professional status. The key to their eventual success in trading stocks is studying common mistakes and crafting the best strategies to avoid them.
To help improve your trading skills, this post looks at the common mistakes that active traders make. Take a closer look to understand how they happen and avoid them when trading stocks.
1. Lack of Ample Training
When you decide to start trading stocks, it is essential to be adequately prepared. However, many are the traders who do not carry due diligence and simply dive into the market. They underestimate what it takes to be a profitable trader and end up incurring losses instead of profits.
You cannot simply walk into the market with some money and expect to take away more from professionals’ form of profits. That would be like gambling and not trading.
Whether USA 500 or Tech 100 stocks, the truth about success in trading stocks is to understand how the market works. You should dedicate your time to study the targeted stocks, the trading platforms, more importantly, how different strategies work.
The good thing about trading stocks is that there are diverse resources dedicated to building traders’ skills. From books to knowledge bases in top stock trading blogs, you can quickly build personal skills and become more successful.
2. Being Too Emotional about Money
One of the reasons why many traders, especially novices, fail to make money consistently is because they are too emotional about funds. While it is true that you might have worked so hard to get the cash, being overly emotional is liable to fail.
After taking trading positions, novices stick to their screens and exit trade because of minor shifts in the market. As a result, they end up failing to make substantial profits in the long-term. The best alternative is reducing the emotional connection with the money and focusing on the bigger picture.
You can also eliminate emotions by adopting the right money management strategies, such as investing only what you are ready to lose, sticking to a good strategy, and using stop-loss orders.
3. Selling to Breakeven
Many traders make this mistake because of not paying attention to indicators that signal poor performance. The problem gets worse when they decide to wait, and the stock returns to the original purchasing price before selling. Unfortunately, the market is volatile, and you cannot be sure that the stock’s price will climb and reach the previous levels.
To avoid this mistake, you should take advantage of indicators that show when a stock’s strength is decreasing. Some good indicators that you can use to know stock performance are Klinger Oscillator and On Balance Volume. To be more successful with these indicators, it is advisable to practice them on the trading charts.
4. Placing Stop Orders Incorrectly
Many traders incorrectly use stop orders, making their positions get closed too early and not capturing maximum profits. While you might have read in different publications that a stop loss point should be positioned based on a specific percentage, the truth is that the amount a trader is willing to risk depends on personal risk tolerance.
So, where exactly should you place the stop loss? You should position a stop loss depending on market signals, such as resistance and support, instead of the profit targets. Because the market tends to move within a specific range under normal circumstances, consider positioning the stop loss around resistance and support areas.
5. Failing to Calculate and Use Risk-Reward Ratio when Trading
Many novice traders often forget calculating and applying risk to reward rations when opening trading positions. A risk-reward ratio is a relationship between the desire for capital preservation on one end and the aim to maximize profits on the other end. So, how do you calculate the right risk to reward ratio?
Here, we must indicate that there is no magic number. Traders tend to identify their levels, but you can follow the following method to get started. A risk-reward ratio is made of three components; the current price (known), targeted profit (subjective), and exit price (subjective). Determining the targeted entry and stop exit points depend on many factors, such as standard deviation.
Expert traders suggest that you should target a reward of about 2.5 times greater than the loss. With this ratio, it implies that for every $1 that is risked, it is estimated that you can make $2.5. Although this ratio has worked well for most pro traders, it is not the standard figure, and you should feel free to work on a different model depending on personal risk tolerance.
6. Following Other People’s Strategies
It is common to hear people talking about the enormous successes they achieved trading stocks, but they rarely talk about the losses. Consequently, novices easily take to their trading strategies expecting to make consistent profits, but this is a big mistake that is likely to end in disappointment.
The truth about stock trading is that there is no one-fits-all strategy. To be successful, you should test different systems and identify the one that works well for your situation. Remember also to factor in the dynamics that come with using different strategies.
For example, if you opt for the scalping strategy, it implies that you need to take more time on the trading chart and exit all trades before the day closes. If you cannot get the time, that strategy will not work even if it yielded excellent results for others.
These are only a few mistakes that many traders make; the list can be a lot longer. To be successful when trading stocks, you should note these mistakes and try to avoid them. Also, you should target improving your skills to increase the probability of making the right decisions.