Nowadays we read about several people on social media who have become traders and made a fortune. This is maybe one of the reasons why people are entering the trading world and unfortunately in several cases these end up losing money. Why is this?
Never learned the basics
In order to enter the market quickly, some traders just open an account without even having the knowledge of certain basic concepts. This will, more often than not, end up in burning all the investment before even starting.
Forget to save
To open an account, you don’t need a huge amount of money. It is however important to have a plan in place of what to do as your account grows. Patience and well thought strategy are important so you don’t end up losing all your growth in the fury of thinking that you have now become a Warren Buffet!
Not keeping a trading history
Keeping a track record is important so you understand what methods worked and what didn't.
Like everything in life, we are all bound to make mistakes and this is also relevant in trading. Consulting experts and having the proper training is imperative in order to build your success.
Not doing research or lack of it
Sometimes we are all tempted to trade on just the basis of hearing some news or because someone is saying to do so. It is vital that before investing we do our own research and make logic decisions rather than just invest on the basis of a rumour or media pressure.
Chasing the price
A common mistake by beginners is that to chase the price. It is very normal to hear about a particular share or asset which is increasing constantly in value. What might happen is that at that point the price has already reached an important level and there is good probability that once you invest, the price will start decreasing as other traders will start to sell to take out their profits.
Fear of failure
Some traders are afraid to lose money and therefore they end up only pursue deals that carry very minimal risk. While risk control is important, at some point or another a trader need to step out of his/her comfort zone and getting use to higher level or risk in order to reap higher rewards.
As time goes by and traders start making money, a very common risk which they face does not come from the market but is actually coming from the inside. Compalcency starts when they become too comfortable and lazy to do additional research or keep an eye on the market. This will end up badly as they will start losing money.
Cutting losses short, let winners run
Psychology plays a vital role in trading. A common mistake done by many is that whenever we have a losing position, we cut out our losses immediately without a proper risk strategy in place. This is because we have the fear that the price will continue to decrease and hence our loss will be bigger. On the other hand when a position is making a profit some tend to leave it open as they think that profits can keep on getting bigger without putting any limits and take out profits.
Big position sizes
Traders might become greedy and when there is an investment which is doing well, they might increase the position size in order to make a higher profit in a short time span.
How can you counter these difficulties?
A) Learn the basic concepts and keep on learning. Even the most experienced traders do! A strong foundation is important in order to familiarize yourself with the markets, concepts and strategies involved.
Visit our manuals section to get the first grasp on the financial markets or book one of our courses.
B) Set a trading plan and stick to it. What level of profit would you be happy with? Many of the most successful traders have very specific goals. By making clear, detailed goals that feel real and motivating to you, you can potentially create your own roadmap to success.
C) Do your own research. Don't trade on the basis of what the media pundits are saying but take time to research and make logic and informed investment decisions. After all each person have their own risk tolerance levels and investment objectives.
D) Share your ideas and consult with others.
E) Buy into weakness, sell into strength (don’t trade the news but make logic decisions)
F) Filter your investments and use screeners. This is an important step to get started
G) Maintain a trading journal. In this way you know what methods worked and what did not. This will also serve as a learning experience as you develop in your trading path.
H) Don’t fall victim to your emotions. You need to build up a strong character in order to avoid the psychological pitfalls of getting too complacent or greedy.
I) Put stop losses and limit orders in place as part of your strategy
J) Patience is important especially with your loosing trades. If you have a well thought strategy, there is a high probability that a losing trade will become a winning trade in the long run.
K) Keep positions small (relative to your overall investment) so that any negative fluctuations will not have a major impact on your overall balance and you can sleep without any worries!