Mistakes to Avoid When Trading In Equities

Dec 11, 2016 14:15 IST 1246 reads,

Trading in the stock markets is one of the most hair-raising avenues of money making. Certainly, not everyone succeeds in doing the same. And, sometimes the reasons are pretty common to the entire losing side. These habits of a trader make it easier for him to get lost in the complexities of the market. We have discussed some of these inept habits that kill your profits in the long run.

We learn from our mistakes but we learn faster if we analyse others. Beginners along with the seasoned traders can improve on their strategies by minimising these following mistakes. With 95% of traders losing the money, you could surely analyse a lot of mistakes.

Lack of Planning

This is more common in amateur traders as they’re blindsided by the sheer excitement of entering the markets and hopes of multi-fold profits. This excitement leads to distraction from the real questions- what’s your plan? What’s your strategy? How do you handle your stop losses? All these and more need to be addressed even before your select a stock to trade in. Only, when the plan is well framed, the trader would be composed in the volatile markets to reap its profit.

Faulty Strategy

Trading is all about strategizing your next move and preparing beforehand. But, it’s not necessary that the strategy may always validate. When this happens, a trader should bite the bullet and change his strategy. Many traders keep their strategies on the pedestal and never adapt according to the changing market conditions. So a trader should have a strategy that’s flexible enough to reap profits no matter what direction the market moves in. Needless to say, one develops these strategies over time.

Optimist in a Falling Market

The most important rule in trading is that you ride the trend and not against it. When the overall market is in a downtrend, a trader may enter a long trade expecting the market may turn in his favour. This rarely ever happens. The market is a combination of multiple factors from global macros to company’s micros. It’s difficult to access the right permutation that may validate your price projections. Thereby, avoid buying a stock thinking it has fallen enough and will not fall further and vice versa in the rising markets. Ride the trend.

Cutting Losses

When traders disregard their stop losses they tend to get influenced by emotions. These emotions make the trader stay in the trade even when it exceeds the stop loss in hopes of the trade turning into profit. No one can pinpoint moves of the market. So, it’s always better to accept your losses and square off. You don’t want to end up losing a hand instead of a finger.

Squaring Off Profits Early

Many novice traders square off their winning trades and let the losers still be at play. This leads to the losers eating into the profits earned from the winning trades. Also, the winning trade may have a potential to make you, even more, money if the trend supports it further. Here’s where avid research comes into the picture which enables you to know almost all aspects of the financial instrument you trade in. If it’s a company, you need to know what its business, what are its revenue streams and how the current macroeconomic environment impacts its growth prospects.

Believing the Market Noise

There’s a constant flow of news, rumours and new price sensitive information in the market. The real skill lies in how one uses this information to make profits and moreover understands what how to neglect market noise. With experience, a trader should be able to filter out market noise or he would end up entering whipsaws, leading to no profits.

Equities are one of the most volatile avenues of income. Thereby, a strong trading philosophy and discipline will go long way. Rather than avoiding mistakes, one must always emphasise on not making the same mistakes again.

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