No matter how skillful or talented you are, you’re bound to make mistakes. The same is true in the world of trading. No trader has ever committed zero trading mistakes in their career.
That being said, it is still extremely important to learn which mistakes to avoid before you jump in the game. Regardless of what kind of trader you are, it’s important to avoid the following common trading mistakes.
Professional traders often succeed in their trades because they use well-crafted trading plan. Using the trading plan, they know when to sell and to buy. They also know how much of their capital are at risk on any given trade.
Meanwhile, it’s very common to see beginning traders trading with only a vague outline of a plan. They tend to play things by ear as they explore the ins and outs of the trading world.
Other times, they do have a trading plan, but they tend to deviate from what they have set out. This kind of trading behavior indicates that the newbie trader still needs to hone his discipline.
Searching Hot Picks
Many newbie traders are guilty of going after currently “hot” stocks or assets with great performance at present. They have the fear of missing out problem.
Oftentimes, they choose only the assets that have had great performance for the past five years. What that tells them is that five years ago was the best time to invest in that asset.
They forget to check if the winning streak the asset has made is about to end. They go after the hot picks only to get chilling realization that the bullishness has run its course.
Failure to Rebalance
Portfolio rebalancing is also very important. This is done to bring back your portfolio to its target asset allocation following your investment plan.
Novice traders and investors oftentimes forget or forgo rebalancing. That’s because such an activity may force them to sell their currently winning assets and buy some of the underperforming ones.
What they fail to understand is that rebalancing helps them prevent their portfolio from being overweight or underweight in market peaks or lows.
Not Considering Their Risk Tolerance
Your risk tolerance simply refers to your willingness to take on risks in exchange of the chance to win something big. Some traders don’t sit well with too much market volatility, while others are okay with it as long as they get the chance of higher profits.
If you ignore your risk tolerance, chances are the market will take you by surprise, or you may be underwhelmed by the performance of your portfolio.
Averaging Up or Down
For an investor with a long-term investment horizon, averaging up on a long position in a highly stable stock may be a good thing.
However, it is not a good idea for short-term traders, since they are mainly playing with market volatility and, more often than not, riskier securities.
It’s never a good idea to keep adding on to a losing position. What will likely happen is you’ll be forced to cut the position after you have incurred a massive loss.