Interest in becoming a stock trader and trading cryptocurrency has exploded in recent years. This is especially true due to the explosive bull market that saw no end for the past decade.
However, many beginners fail in the market due to not learning or heeding from past errors with stock trading.
These errors can range from not selecting the best stock trading platforms to going all-in on a stock based on rumors and without a trading plan. Because of the volatile nature of certain types of stocks, it’s common to hear stories of people making and losing millions of dollars.
Expecting a 1,000% Return Overnight
Many make the mistake of going into the market expecting extravagant stock trading profits overnight. Unless a trader hones in their trading psychology, this type of mindset can lead to overtrading, increased greed and blown up accounts.
Whether it’s waiting for the perfect setup or holding an investment for years, you must be patient and have realistic expectations. These are essential for long-term success.
More often than not, it’s easier to be patient if you compare each trade or investment to starting a new business. You want to give it time and room to grow and know when to cut your losses.
Placing Trades Based on Rumors
Before the internet, many people relied on the news and rumors to base their investments. This led to many people losing significant sums of money due to buying into junk or pump-and-dump stocks.
An unspoken rule of stock trading is that once you hear about a potential investment in the news or from another, it’s far too late to jump in. The reason is that many “smart” investors or those with deep pockets have likely gotten in at a much lower price point.
The sudden influx of investors leads to price rising, making it a prime topic for the local news.
If you hear about potential investments from someone or the news, the first step is always to conduct your due diligence.
Not Diversifying
Regardless of the type of trader, diversification is wise as part of any stock trading strategy. Many new traders and investors put all their funds into one or two investments hoping for quick and explosive returns.
Diversifying investments allows medium to long-term holders to protect their portfolios from unforeseen variables. These include economic fluctuations and natural disasters, to name a few.
Margin Trading Without Experience
Another reason many traders quickly blow up their accounts is due to trading on margin without much experience.
Margin trading often sounds promising because an investor can borrow more money than they actually have in their accounts. However, while a good trade can lead to significant profits, your account can go down just as quickly on a bad trade.
Oftentimes, brokers require a certain amount of experience or an understanding before allowing someone to trade on margin. Whenever possible, it’s best to learn more about a broker’s margin requirement before applying it to your account.
Not Having a Solid Trading Plan
As a new trader, it can be daunting when faced with the thousands of options for stocks. Most successful traders and investors have a defined trading plan in place before placing their trades.
This allows them to measure their maximum risk per trade, so they can sleep at night while it’s in play. Most new traders fail to have a trading plan, leading to higher stress and emotional trading. This is dangerous because emotional trading typically leads to significant losses.
Avoiding Proper Stop-Loss Placement
Not using a stop-loss order is common for many traders who don’t have a solid trading plan. This type of order has a lot of benefits and is designed to limit losses on any given trade. Of course, the disadvantage is placing a stop order and having the price bounce back towards your target.
Overall, a stop-loss order is advantageous for many traders and helps produce more logical trades rather than emotional ones.
Learning From Errors With Stock Trading
Mistakes will always happen whether you’re a novice or a seasoned vet. Trading is a journey, and as long as you can learn from your errors with stock trading and have a plan in place, it can be a rewarding and fulfilling career. If you enjoyed this article, check out some of our other recent blogs!