The world of trade is often unstable and uncertain, and no matter how experienced one is, it is impossible to make accurate predictions at all times. Anyone who wishes to invest in trading is bound to incur losses at some point.
Especially newbie traders, who do not have an in-depth knowledge of the various trade practices and trends. They are more prone to losing money than experienced traders are. However, facing losses does not mean that one should give up trading completely.
By carefully studying the nature of trade practices, one can learn what works and what does not and avoid ineffective practices that will result in losses.
5 mistakes to avoid for new traders
Listed below are the top five mistakes that new traders tend to make and the various ways in which they can avoid them.
- Trading Without a Clear and Proper Plan
The first and the most common mistake that most newbie traders tend to make is getting into trading without structuring a proper plan. Any trader who dives into the world of trade is bound to end up in a disaster and lose both time and money.
Even with a proper plan, trading is quite risky owing to its unpredictable nature, and that is why it is imperative to devise a plan with a clear strategy and commitment.
Your plan could simply involve maintaining a journal that keeps track of your investments, drafting the entry and exit conditions, and listing out risk management rules.
In due course, your journal will become more of a guide and help you keep track of your trade profits and losses. This will help you to learn from your mistakes and make further trade decisions with more clarity.
Planning also includes being prepared to face any loss or risk that might befall the trader. Therefore, before taking it up as a serious practice, it is important that any trader, no matter how experienced, ask themselves these questions:
- The amount of money you plan on investing every month for every stock
- How are you going to handle your profits and losses?
- The amount of loss you are willing to take
These questions help one to critically analyze and understand one’s own attitude towards profits and losses. Moreover, this, in turn, will aid in making responsible investments. Regardless of the value of the stock, it is mandatory that you study it thoroughly before investing in it. It is essential that you do not take act impulsively and make rational and logical decisions.
- Trading Without Stop Losses
Trading without fixing a stop loss is another common mistake that beginners often tend to make. Though fixing a stop loss on your stocks might appear to be quite risky, it is not so. On the contrary, trading without it will only lead to significantly irrevocable losses.
When there is a price level change, it is indicative of the fact that your plan did not work out, and it is in cases like these that stop losses can help you. Not fixing a proper stop loss is also suggestive of the fact that you do not have a strategy planned out for your losses, which is an error no trader can afford to commit.
The primary objective of a stop loss is to ensure that your losses are not enormous. Fixing a stop loss is indicative of a well-planned stock investment. Trading, as we know, is unpredictable, and therefore, it is impossible not to face any loss. However, by fixing a stop loss, you can fix a point of exit for your losing trade, and by doing so, you will be able to fight your losses and not suffer huge losses.
- Trading With Unrealistic Expectations
Setting goals for your profits is advisable as it helps you devise a proper plan before you invest in a particular stock. However, as a beginner, you have to be quite realistic with your goals. A general pattern that can be observed among new traders. Most of them tend to set goals or expect profits that are excessively high and unrealistic to be achieved within a short span of time.
We have already established the world of trade is quite unpredictable. Therefore, a new trader desiring to make huge profits in his first attempt has higher chances of making impulsive investments that are driven by emotions rather than reason and logic. This again is indicative of investing without a proper plan, and such investments tend to be more risky than profitable.
Therefore, before investing in a particular trade, it is quite important that the trader sets realistic and achievable goals. While having goals can help the trader stay motivated and devise clever strategies, it is equally important to ensure that these goals do not lead to false expectations. One way to analyze and establish realistic goals is to maintain a journal that contains a list of profits and losses that will help the trader to understand his strengths and weakness and estimate his returns accordingly.
- Revenge Trading
One of the most dangerous practices that new traders follow is Revenge Trading. This happens when one is overly influenced by their emotions over a particular loss and tries to aggressively retrieve their investments by acting impulsively.
These people fail to understand that losses are part of trading, and it is almost inevitable. Desperately trying to make up for the losses without thinking of the consequences only leads to more losses.
Understand risk management plays a key role in developing healthy trade practices. By studying how to manage risks, one can avoid being overwhelmed when faced with a huge loss.
Apart from this, trying to limit your expectations can also help you make rational decisions. Furthermore, strict maintenance of profits and losses and carefully studying them aids people to stay informed and gain an understanding of their own strengths and weaknesses. By simply understand one’s own shortcomings, one can avoid repeating the same mistakes in the future.
- Trading With Too Much Confidence
New traders often fail to recognize the complexities of trading. After having received very little knowledge, they make uninformed and impulsive decisions, often resulting from being too confident of their knowledge.
Even for traders with years of experience, it often becomes quite difficult to make the right investments. So it only makes sense that when a new trader makes a hasty decision, he or she is bound to end up losing a lot of money.
To make the right investments at the right time, it is imperative that traders learn to practice patience and perseverance. Being patient will help the trader realize his capabilities and potential. With perseverance, the trader will be able to work on his strengths and weakness and work towards making rational and cautious decisions.
We now know that profits and losses go hand-in-hand in trading, and facing losses does not necessarily mean that one should stop it. We have learned that with proper planning and recording of analyses, one can learn from their mistakes and prevent themselves from it repeating it in the future.
The more time one spends trading, the more he/she will learn about it, and the more knowledgeable they become of the trends and practices. By constantly analyzing one’s own trade practices and acknowledging their mistakes, one can slowly learn to master the art of trading. You can do this with steady and rational patience and turn their shortcomings into positives that will fetch them a lot of fortune.
There are demo trading accounts as well that you can take advantage of. Open an account at IC Markets or eToro and trade without risking your money. This will help you get proper insights into the trading world.