Many novice and emerging stock traders enter the markets with high profit expectations, only to discover that consistently making money isn't as easy as they thought. This realisation can be disheartening for some, especially because few activities elicit as much human emotion as trading. People are often drawn into the trading arena by the prospect of making money, but the reality of taking a loss can be a brief drawback.
The key to your eventual success is to learn from your mistakes and minimise them in the future. You are not learning unless you make mistakes. However, repeating those errors is completely unacceptable. Not only do you need to know what to do, but you also need to know what to avoid, which is what this article is about. I'm sharing my mistakes so that traders like you can succeed faster.
1. Trading Stocks Without a Plan
Many new traders enter a trade with the hope that the stock price will rise as soon as they enter. Anyone who has traded knows that this is extremely rare.
However, this fact does not deter newcomers. If the trade begins to move against them, they will allow their emotions to take over, looking for reasons to convince themselves that the stock price will rise. In some cases, a new trader may enter a stock, causing the price to rise. They do not sell and profit because greed prevails. Soon, the trade turns against them, and they've turned a profitable trade into a losing one.
2. If you keep losing, stop trading.
Two trading statistics should be closely monitored: Your winning percentage and risk-reward ratio. Your win-rate is the percentage of trades that you win. For instance, if you win 60 trades out of 100, your win-rate is 60%. A day trader should strive to keep his or her win rate above 50%.
On an average trade, your reward-risk ratio is the amount you win compared to the amount you lose. If your average loss is $50 and your average win is $75, your reward-risk ratio is $75/$50=1.5. A ratio of one indicates that you are losing more than you are winning.
3. Trading with No Stop Loss
Every day trade you make should have a stop-loss order. A stop-loss order is an offsetting order that exits a trade if the price moves against you by a certain amount. When you use a stop-loss order on your trades, you remove a significant portion of the risk from the investment. If you begin to lose money on a trade, the stop-loss prevents you from losing more than you can afford.
4. Shorting the Hype Crypto/Stocks too Early
What goes up must come down, and this is especially true for stocks that are pumped and dumped. However, you must be mindful of your timing. Do not sell too soon! Remember that hype can keep a cryptocurrency's price rising for much longer than you can handle. You must determine the "top" of a cryptocurrency/stock. This begins with identifying resistance levels and determining when buyers are leaving and sellers are taking over.
5. Purchasing Stocks/Cryptocurrency with No Volume
As a trader, you are given price and volume information. However, most new traders focus solely on the price and completely disregard volume. This is a serious error. On very little volume, market makers can move the stock in one direction. A stock may be up 10%, but if you look at the volume traded, you'll notice it's only 5,000 shares. Avoid these pitfalls by remembering that price is validated by volume.
6. Taking on more risk than you can afford to
The most important aspect of your risk management strategy is deciding how much of your capital you are willing to risk on each trade. Day traders should ideally risk less than 1% of their capital on any single trade. That is, a stop-loss order closes a trade if it results in a loss of less than 1% of trading capital. That means that even if you lose multiple trades in a row, you will only lose a small portion of your capital. At the same time, your losses are recouped if you make more than 1% on each winning trade.
7. Putting Everything on the Line
Even if you have a risk management strategy in place, you will be tempted to disregard it and make a much larger trade than usual. You may have had several losing trades in a row, making you want to recoup some of your losses. A winning streak can give you the impression that you can't lose. There will always be one trade that promises such high returns that you are willing to risk everything on it.
8. Attempting to Predict the News
Predicting the direction of the price movement and entering a position before the news is released appears to be an easy way to make a windfall profit, but it isn't. Price will frequently move in both directions, sharply and quickly, before settling on a consistent direction. That means you're just as likely to be in a big losing trade as you are in a winning trade within seconds of the news release. There's another issue. The spread between the bid and ask price is frequently much wider than usual in the immediate aftermath of the release. You may be unable to obtain the liquidity required to exit your position at the price you want.
If these suggestions sound like gambling warnings, that's because they are. Day trading, or stock trading in general, can cause people to make or lose a lot of money in a single day. Now that you've learned about these blunders, consider how many of them you're making. Be truthful with yourself; your financial future is at stake.
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