1/16/2024

5 common mistakes traders make

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Mistakes are the part of the learning process, when it comes to trading or investing. Some are more harmful to the investor, while others are worse to the trader. But still, all players should remember the following 5 common mistakes and try to avoid them.

 

Lack of a trading plan

Old traders approach trading with a well-defined strategy in place. They carefully consider entry and exit points, the amount of capital to allocate, and the maximum potential loss they are willing to tolerate.

In contrast, novice traders often enter the market without a clear trading plan. Even if they start with a strategy, they may be more susceptible to emotional decisions and alter their course mid-trade. For instance, they might shift from a long to a short position after a stock price dip, only to witness it plummet further.

Rebalancing is not carried out

Rebalancing involves adjusting your investment portfolio to ensure it remains in line with your predetermined asset allocation, as established in your investment plan. This process can be challenging because it may necessitate selling an asset class that has been performing well and purchasing more of another asset class that has been underperforming. Many new investors find this difficult to do. However, allowing your portfolio to simply follow market returns guarantees that asset classes will be excessively valued at market peaks and undervalued at market troughs, leading to bad performance.

 

Ignoring risk aversion

Before making any investment decisions, it’s crucial to assess your risk tolerance. Some individuals are uncomfortable with the fluctuating nature of the stock market or riskier investment strategies.

Other investors may prioritize guaranteed regular income from their investments. Those with a low risk tolerance should focus on blue-chip stocks of established companies and steer clear of more volatile growth stocks or startup ventures.

However, it’s important to remember that every investment carries some degree of risk.

Treasury bonds and bills represent the lowest-risk investment options. From there, various types of investments ascend the risk ladder, offering higher returns in exchange for the increased risk involved. If an investment presents an exceptionally appealing return, carefully evaluate its risk profile and determine the potential loss you could incur if things take a turn for the worse. Never invest more than you can afford to lose.

Foggeting about the time horizon

Never invest without a clear timeframe in mind. Assess whether the money you’re allocating to an investment might be required elsewhere before engaging in a trade. Additionally, establish the duration needed to accumulate savings for retirement, a home down payment, or your child’s college education.

If your goal is to build savings for purchasing a house, it could be seen as a medium-term strategy. Conversely, if you’re focusing on financing your child’s college education through investments, it should be viewed as a long-term financial commitment.

 

Letting your losses grow

A key trait observed in accomplished investors and traders is their capacity to promptly acknowledge a minor loss in the event of an unsuccessful trade and swiftly transition to the next trading opportunity. Conversely, those who are less successful might find themselves immobilized when a trade turns unfavorable. Rather than taking immediate steps to curtail their losses, they may cling to an unfavorable position, hoping for a positive turn. This reluctance to cut losses can result in prolonged depletion of trading capital, leading to escalating losses and significant capital erosion over time.

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