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Over the past 2 years of being an option trader, I’ve seen 10 common mistakes that new traders in the stock market make – myself included.
In this article I want to share these common mistakes, and show you how may be able to avoid them–thus drastically improving your odds to becoming a profitable trader.
Here’s some of the most common mistakes traders make in the stock market.
A common mistake traders make is going into the market without a plan–this is like a hiker without map. If you do not have a trading plan, you’re opening yourself to trading with your emotions, and this can be destructive to your portfolio and mental health.
Instead…
Of going in without a trading plan start with something basic and simple, such as a daily stop loss, a proper position size, and perhaps some technical analysis on the stock you want to trade.
Here’s an article that discusses about risk management and has a simple trading plan to follow: Understanding Risk & Trade Management for Traders.
When you’re deep in the trenches, it can be difficult to remember your trading plan. Try your best to stick to the trading plan you’ve created. Practice, practice, practice!
As traders, we’re market timers. We analyze the charts and the market conditions, and make an educated guess where a stock is going to move. When the market tells us we’re wrong, this can take a hit into our ego, and make us trade with our emotions.
It’s important for traders to accept when they’re wrong and accept the loss. Trading is about a game of probability, and statistical expectations, not a game of truth. Accept the loss, and live to fight another day.
Money is the main tool for a trader. Without proper management of your cash, it can destroy your portfolio in a single trade. Carefully manage your money, and watch you become more profitable over time.
Most of the time traders will lose trade after trade – which is part of the game – and the trader will make the mistake to over size on a position to make the losses back. If the over size position works out on their favor, great! But if it doesn’t, they’re more likely to destroy their portfolio.
Avoid the mistake by properly sizing in based on your account value. If you’re trading weeklies, perhaps go in with 0.5% to 1% of your portfolio size. If you’re trading monthly contracts, may go at maximum with 10%.
Compound interest is a real thing, it can make up for your losses quicker then you thought.
The saying goes, cut losers quickly, and let winners ride. A common mistake traders make is cut their winners too early. This usually happens because they fear losing capital gains.
Avoid this mistake but letting the trade play itself out. Add breakeven stop-losses if you need to; but give the trade the chance to harvest a great return.
Traders often make the mistake of going for unrealistic price target expectations. Avoid the trading mistake by thinking of your trading position as items you want to sell at a given reasonable price.
Another mistake to compliment the one above is not defining price targets. This is also related to the first mistake of not having a trading plan. Make sure to see what’s a realistic price target expectation so you can maximize your profits.
Some traders make the mistake of picking the most volatile stock of the day, because they want to make a quick buck or want to get an adrenaline rush. Traders who continue to pursue this style of trading may get lucky a few times, but the losses will catch up.
Profitable traders avoid this common trading mistake by sticking with the boring trades. Trading is about making money on a consistant basis, not to look for the thrill and blow away your hard earn cash.
The best traders always review their trades, and write them down on a journal–so they may be able to find inconsistency and mistakes to avoid. If you want to avoid common mistakes you’ve made in the past trades, give journaling a chance so you can spot them out and become a more profitable trader.