As people were stuck at home due to Coronavirus lockdown since last year, many countries, including India, witnessed a monetary growth in online stock trading.
Several platforms like Groww have reported a surge in demat accounts since April last year. According to BSE data, brokerages had added 13 lakh average new demat accounts every month since April last year.
Stock trading is a lucrative money-making option. However, it involves a lot of risks. Even with zero commission and simplified features like one-click buy and sell, stock trading remains a complex process.
Stock trading mistakes carry the risk of losing substantial money, especially as a beginner. It takes careful research, strategy, and experience to make the right moves.
15 Common Mistakes in Stock Trading, Intraday and Option Trading to Avoid
Traders are usually involved in short-term transactions like buying and selling futures and options. Investors focus on long-term and trade in stocks and other securities. Here are some of the top trading mistakes to avoid as new traders/ investors and ways to fix them.
Trading Without a Plan
Having too much money does not compensate for experience. Trading plans include the amount you are willing to invest, time commitments, and strategy on entry and exit points.
They can act as a blueprint for trading when you go out in the market. But, unfortunately, sometimes beginners do not prepare a plan, and in other cases, they do not stick to it after a bad trading day.
Trading mistake loss: Not researching the market properly and not having a trading plan can lead to bad decisions. Even if the market does not move in the anticipated direction (Whipsaw), scrapping the plan or deviating from it can lead to unsuccessful trade.
Trading mistake fix: Watch educational content and read about intraday, option, and stock trading. Then practice with a simulated trading account like TradeStation and Thinkorswim by TD Ameritrade. Finally, maintain notes or journals to record what led to a successful trade and what did not.
Prepare a trading plan backed up by market research and evidence that helps you stay objective. Think about the type of market, degree of volatility, and other important factors before committing to a position. Do not trade due to just an unfounded tip.
Not Considering the Risk to Reward Ratio
The risk to reward ratio is the ratio of the cost associated with the initial position to the potential profit. Unfortunately, beginners get too excited about trading and do not have the patience to consider the risk to reward ratio.
Trading mistake loss: Sometimes, the end profit is not enough to risk losing your capital. Individuals who do not wait for the right trade can enter the position at the wrong price.
Trading Mistake fix: Look at the risk profile of the asset you are interested in. Have a risk management strategy while trading. As a beginner, you must stay away from highly volatile markets that have high risks. 1% rule for day traders is to limit the risk on a trade to a maximum of 1% of the total account value.
Use technical analysis to conclude whether a deal is right for you. There are several risk management software options like Lightspeed available in the market.
Beginners can invest too much in one asset, such as buying many stocks that are moving up to get larger profits. Thinking that the market will continue to rise and overexposing a position is one of the biggest day trading mistakes.
Trading mistake loss: Big trading bets are one of the fastest ways of losing all your money. Risking more than you can bear by committing high capital to a market causes beginners to give up on trading.
Trading Mistake fix: When you start trading, limit your shares below 100. Trade a maximum of two stocks a day. Also, do not trade too often. Instead, focus on growing your knowledge, experience, and assets gradually. You can use stock screeners like Tickertape and Zerodha Pi for proper trading setups.
Focusing on Hot Trades
Beginners usually wait to confirm their estimate before entering a position and miss planned entry and exit points. So, they end up with panic buying and selling stocks whose price trends are the highest in the market.
Averaging up because of growth in security is risky. Hottest stocks have the highest momentum and can fall as quickly as they arise, making them risk prone.
Trading mistake loss: There are many causes of the instant loss of money when the stocks stall and fall.
Trading Mistake fix: While starting, follow strong stocks on platforms like TradingView, but focus on fixed and reliable returns.
Buying Stocks with No Volume
Beginner stock traders look at the price and do not see the volume. Thus, stocks moving strongly in one direction on zero or low volume is due to momentary hype by market makers.
Trading mistake loss: This is one of the most common trading errors, and many end up buying a worthless stock.
Trading Mistake fix: Confirm the price action with volume always. This data is given on different trading platforms like E*Trade and Charles Schwab.
Mismanagement of Positions
Managing winning positions is not easy for new traders. This is one of the common intraday trading mistakes as you move into and out of positions very quickly. Many of the traders sell the winner’s stocks too early or wait too long.
Trading mistake loss: Selling early means decreasing the amount of potential profit. Waiting for long can make the net profit zero.
Trading mistake fix: Decide exit points before entering a position and follow the rules. Enter good trades and exit the one causing loss. Try to sell a winner all at once or at least half of it. You can use software for technical analysis like NinjaTrader and Vector Vest.
Not Cutting Losses Quickly
Not cutting losses quickly is one of the common day trading mistakes. Beginners can confuse trading with investing and hold on to losses or buy more stocks when the price reduces with hopes that they can recover.
As all trading positions are closed by the end of the trading day, this strategy fails for day trading or short-term trading when dealing with volatile and risky securities.
Trading mistake loss: Adding to a losing position means growing losses. This mistake affects the prospects of day traders due to huge capital losses, time wastage, and the extra effort needed.
Trading mistake fix: Sell when you know the losing stock will not recover before the market closes. The stop order option is available with stock market software like Zerodha.
Stops do not always close your trade to the desired level if you keep the position since the market can jump from one price to another without any market activity at this time.
So, do not keep a position till the next day. Instead, attach a limit to your position if you want your trade to close automatically after reaching a certain point.
Emotional Trading Mistakes
Both good and bad emotions can prevent beginners from making smart decisions and deviate them. They can make decisions in a rush without proper analysis due to overconfidence.
In other cases, they can abandon their existing plan. Just because a company is good and its assets have been doing well in the past years, it does not mean that its prices will not go down now.
Trading mistake loss: Biased decisions due to the fear of missing out on great returns wipe out recent gains and lead to losses.
Trading mistake fix: Use the technical and fundamental analysis for opening positions. If you are a day trader, focus on present market signs more than the fundamentals. You can use technical analysis sites like eSignal and Trade Ideas.
Overdiversifying a Portfolio
Although a diverse portfolio gives better benefits over a single trade in one market, opening too many positions quickly with the hope for good results is detrimental to people who are new to trading. Beginners do not have enough experience to handle so much work at once.
Trading mistake loss: Stock moves below the stop position leads to large loss and risks the margin issue. Also, trading multiple markets can prevent you from becoming an expert in the stock, intraday or options market.
Trading mistake fix: Set a stop price and get out of a position if you are unsure how to handle it when the situation worsens. This minimizes risks by capping losses before they become sizeable. There are portfolio management software solutions like Master Investor in the market.
Forgetting About Taxes
One of the most ignored trading mistakes by beginners is not paying attention to tax adjustments before calculating net profits. They can overlook credits and deductions while filing taxes.
Trading mistake loss: Lower return on investment than expected.
Trading mistake fix: Look for a broker with low charges like Interactive Brokers, Tastyworks, and eOption. Think about your tax bracket and time horizon. Then, plan your tax strategy well.
Too Many Indicators
New traders at times think that applying more market indicators will lead to better results. However, anyone, especially those starting, can get confused due to several technical indicators and not focus on the market.
Trading mistake loss: Loss of time and inaccurate decision-making.
Trading mistake fix: There are several software options like Masterswift 2.0 and ECG Trade that you can use. But choose the indicators that work best for you by trying them out in batches. Then, improve your trading skills using these indicators (such as volume-weighted average price).
Unable to Rebalance
Rebalancing means returning your portfolio to the target allocation of stocks/assets as per your plan. Novice traders find it difficult since they may have to sell their high-earning assets and buy the underperforming ones.
Trading mistake loss: Poor performing assets that are overweighted at
market peaks and underweighted at lows.
Trading mistake fix: Proper portfolio management. You can use platforms like Personal Capital and Quicken Premier.
Not knowing leverage
This is mainly a part of forex trading mistakes. Leverage is a loan to open a position. The borrowed money is used to increase profits by gaining market exposure, but it can also exponentially increase the losses on a losing trade.
Trading mistake loss: Excessive leverage can lead to losing the entire trading account balance with just a little change. You can also end up with debt obligations.
Trading mistake fix: Know about the pros and cons of leverage properly. Do not use it excessively. High leverage forex brokers include IC Markets and AvaTrade.
Going for false trade signals
Beginners invest in a stock that has a price decline without analyzing the reasons. If the reasons are higher competition, CEO resignation, and other fundamental causes, the price may remain long for a long time.
Trading mistake loss: The mistakes traders make by falling into the trap of wrong trade signals like low stock prices result in high losses and risking debt.
Trading mistake fix: Do proper research and assess the stock’s outlook before deciding. Invest in companies that are likely to grow in the coming times. Then, you can use tools like MetaStock and Scanz for stock analysis.
Not researching about right stock market software
As a beginner, not choosing the right stock trading software can cause a lot of problems. Software may have good reviews, but it might be designed for advanced professionals.
The chosen share market software may not offer demo trading for practice before actual investment. This is highly important to prevent option trading mistakes.
Trading mistake loss: Waste of time due to high charges, difficult navigation, and limited software features.
Trading mistake fix: Know about the different software available in the market within your budget. Understand the pros and cons of each.
Choose the one that has all the required features and can be customized to your needs. Make sure it has a demo account (such as in Etoro) to practice trading.
Avoid Common Stock Trading Mistakes as a Beginner
Analyze the market and its moves before investing in any stock. Then, plan your stock trading path to be aware of challenges and opportunities. The best way is to invest in the right trading tools like stock market software, which will help with technical analysis and buy & sell signals.