More people than ever before have entered the complex world of trading stocks.
Considering that the stock market remains the best way to grow wealth in the long-term, that’s a very good thing, but it still only works for people who know what they’re doing.
In the past, most people without finance or business degrees had to rely on financial advisors and other financial experts to do the heavy lifting for them. However, innovations in financial technology have reduced the barriers to trading, both in terms of the initial complexity and the cost.
That has brought millions of new people to the stock market who lack the basic financial literacy to trade in a way that will actually benefit them in the long run.
The answer is education. Luckily the Internet is filled with articles just like this one tailor-made to help you make the best of this new journey toward financial know-how and stability.
Here’s just a few tips on common mistakes to avoid when you’re just getting started.
Make A Plan
So you feel really, really passionate about GameStop. That’s great. Investing in what you care about personally can be one of the enjoyable parts about trading — but historically, it’s not a great idea.
Instead of just picking your favorite companies, start out by making a plan that has specific price targets for making profits and keeping losses to a minimum. The market is always changing. Having a plan allows you to avoid the worst outcomes from the unexpected.
Take the advice of best-selling author on trading Van K. Tharp: “A peak performance trader is totally committed to being the best and doing whatever it takes to be the best. He feels totally responsible for whatever happens and thus can learn from mistakes. These people typically have a working business plan for trading because they treat trading as a business.”
When many traders start out, they have a tendency to put too much capital into a single trade, especially when they’re “feeling lucky.” Often, the result is lots of money lost to a mistake that was easily avoidable.
Luck doesn’t make traders wealthy, but keeping your trades to a reasonable position size just might get you where you want to go. You should carefully recalibrate that position each week, rather than suddenly tripling your stake without proper analysis.
Cut Your Losses
This might sound a bit repetitive, but most successful traders (including a little-known investor named Warren Buffett) say that reducing loss is much more important than anything else.
Sometimes a trade goes the wrong way. It happens. At that moment, the trader may think that the position will change its course, and neglect to exit — even if their trading plan (remember?) explicitly tells them to exit the stock at a predetermined price.
By setting a pre-determined stop-order price, a move in price signals a change in trend. Without action, your losses can build up quickly in this situation. To avoid that, the trader should be ready to cut losses at a predetermined price without hesitation.
As Warren Buffett puts it: “You need to know very well when to move away, or give up the loss, and not allow the anxiety to trick you into trying again.”
Trust Logic, Not Feelings
In general, too many traders allow their feelings to get in the way of their trading.
“I teach traders how to find high probability trade setups using fixed parameters. What this means is that if the stock is showing A, B, and C, then it is a buy. Or if the stock is showing X, Y, Z, then it is a sell. And the best part is, we can program the A, B, Cs, and the X, Y, Zs in trading platforms, and it literally takes seconds to identify trade opportunities based on a set of fixed criteria,” Choi said.
In summary, keep reading, learning and exploring the stock market. Don’t neglect to continue studying and you will eventually see the results that you want.