Among all the people who ever wanted to be stockbrokers, only a handful of people succeed. Many people wonder what the secrets are to becoming an exceptional trader, while others contemplate what they are doing wrong. In reality, the best traders make it to the top by learning from their mistakes.
But first, you need to understand what your mistakes are. Here are _ of the most common reasons why traders fail to meet their goals, some of which could apply to you as well. Read on to find out more!
Understanding the Errors that Traders Make
- Lack of a Clear Trading Plan
Not everyone is a full-time trader working with an institutional brokerage firm; thanks to technology, trading has become open for everyone. A mistake that part-time traders (and some full-time ones as well) make is that they never construct a long-term plan or goal. Trading requires you to read up a lot about which securities you want to trade, why, how much you plan to make, and such details.
Knowing these beforehand narrows your trading activity to a particular segment of the stock market where you can specialize and get better. Trading without a plan and hoping that everything will fall into place is the first mistake.
- Not Putting in Enough Research
Stock trading is not just about buying and selling stocks and making a few bucks on the side; it is certainly not the same as gambling. With sufficient research, you can devise trading strategies to earn consistent profits.
As a trader, you need to know all the terms and jargon associated with the stock market and securities. You must also read up financial news, events, companies’ quarterly announcements and look out for other activities that can impact the stock market prices. This reading process is not a one-time thing; you must do it every day as long as you trade.
You don’t have to go out of your way to find these resources; most trading platforms like TradingView give live updates and data while you trade. There can indeed be a lot of noise, misinformation, and rumors about stocks, but with time and practice, you will get the hang of sifting out the genuinely useful information.
- Misusing Automation
Today, most of the traders seek the help of algorithmic trading and automation tools to help them execute a large volume of trades quickly. Some traders have more tools and software aids than others, but the catch is that with greater computation power comes greater laziness. That is where the trouble is.
Remember that a computer can automatically perform tasks that you ask or program it to do. You set the trade parameters, stop-loss limits, and other data before the trading begins. A computer is a tool to increase the efficiency of trading and minimize the errors that a human is likely to do; it is not a replacement for the mind of a human trader.
- Psychological Interruptions
Stock trading is mainly data-driven, with investors using technology to interpret data to find trends and patterns. Things get awry on the trading floor when emotions and other psychological factors come into play.
The greed to earn more money, following gossip and gut feelings instead of relying on robust data like those obtained from stock APIs, and the pressure of losing too much money can make you execute bad decisions. The worse part is that the action of a few players can topple the entire financial market, similar to the 2008 financial crisis.
So, before you start trading, have realistic expectations about your profits, set a limit for your losses, and keep your emotions at the door. A few bad hours or days do not signal the end of your trading career, but clinging to your feelings is always a bad sign.
- Random Reinforcement
Random reinforcement is one type of psychological influence on traders that is quite commonly seen. In short, it means that you attribute a random outcome to skill or lack of it. Random reinforcement could lead to traders developing long-term bad practices that are very hard to reverse.
For example, you could believe that a string of losses means that you no longer have the knack for trading or that a well-executed deal is actually luck. With the market being so dynamic, you should understand what events are truly random, which ones you can predict, and which ones are mistakes. Knowing these will help you hone your skills in the right direction instead of following the wrong path without even realizing it.
- Putting Strategies Ahead of Principles
New traders often get carried away with fancy terminologies involving strategies that professional traders use. In the act of using the same approach for their trades, traders tend to forget the underlying principles of the stock market. Going after procedures without grasping the fundamentals is like missing the forest to get the trees.
Whenever you do any action, understand the reason behind it. Only when you follow the principles and create your own strategy, you know exactly when to use it and when not to, and other consequences. Copying what others do or trying out some tactic you read off the internet is likely to backfire.
- Not Monitoring Your Progress
Every trader should ideally maintain a journal to note their trading activities: missed opportunities, best deals, number of shares/total investment, description of the entry and exit signals, and other details. By analyzing what you did right and what went wrong, you begin to improve at making decisions, understanding the market, and trading more professionally.
Every day, you are likely to get drowned in a flood of information like prices, dates, and other numbers. Without a journal or other means to track your progress, you can make the same mistakes again, curbing your chances of improving your trading skills.
Practice Makes Perfect
Strategies and sophisticated analysis can surely give you an advantage on the trading floor, but the easiest exercise you should do as a novice is to practice. Before trading in the actual stock market, sign up for virtual trading platforms, where you get virtual money to buy and sell free stocks online. Gain experience by trading virtually and make mistakes, but importantly, learn from them.