- Chasing Performance:
Many investors choose asset classes, strategies, managers, and funds based on recent strong performance. The fear of “missing out on great returns” has led to numerous poor investment decisions. If an asset class, strategy, or fund has performed exceptionally well for the past few years, one thing is clear: It would have been better to invest a few years ago. The cycle responsible for this performance may now be coming to an end. Smart investors are exiting, while others are rushing in. Stick to your investment plan and rebalance, instead of chasing past performance.
- Lack of a Trading Plan:
Not having or sticking to a trading plan is a common mistake among beginners. Experienced traders enter a trade with a clear plan. They know their entry and exit points, the capital to be invested, and the maximum loss they are willing to bear. Beginners might start with a plan but often abandon it if the trade is not going as expected, unlike seasoned traders who remain disciplined.
- Failure to Cut Losses:
A key trait of successful traders is their ability to accept small losses quickly if a trade isn’t working and move on. Unsuccessful traders tend to hold onto losing positions, hoping the trade will turn around. This inaction not only ties up capital but can also lead to mounting losses and significant depletion of funds.
- Booking Small Profits:
Many beginners cut their profitable trades too early while allowing their losing trades to accumulate. Trading is not about being right all the time; it’s about minimizing losses when wrong and maximizing gains when right. Successful traders focus on winning big and losing small.
- Attaching Emotions to Trading:
Emotions heavily influence our actions. A common issue among traders, whether new or experienced, is that their emotions can fluctuate wildly in the markets. We’ve all experienced emotional reactions—panic-selling at the worst time or becoming overly greedy and taking unnecessary risks. This is where a solid trading plan helps: Stick to it and avoid letting emotions interfere with your trades.
- Unrealistic Expectations from the Market:
Some new traders enter the stock market with unrealistic expectations, hoping for quick profits from day one. This often leads to losses. From the outset, it’s important to understand that making money in the stock market, like in other areas of life, requires qualities such as hard work, patience, and intelligence.
- Lack of Research:
New traders often skip essential homework or fail to conduct thorough research before initiating a trade. Research is crucial because beginners lack the experience to recognize seasonal trends, data release timings, and market patterns. The eagerness to trade often leads them to overlook the importance of research, which can be an expensive mistake.
- Bottom Line:
Trading can be profitable if the common mistakes outlined above are avoided. While traders of all experience levels make these mistakes from time to time, beginners should be especially cautious, as their ability to recover from significant setbacks is more limited compared to experienced traders.