The financial markets can be tricky to master and trade profitably, and there are a number of dangers lurking behind corners that traders should take care to avoid. In share markets, the size of investment positions can go down as well as up, and it’s crucial that traders take steps to learn from the mistakes of their past and develop their future trading patterns accordingly. Without necessarily having to make each key mistake yourself, it can be possible to learn the common pitfalls and how to avoid them, in order to give your trading a better chance of an aggregate profit.
Making a mistake when trading shares or otherwise dealing in financial markets can quickly become a costly process. When capital can both increase and decrease, it’s important for traders to make sure they are making good calls more frequently than bad, and that they are doing their level best to steer clear of the common pitfalls that tend to catch out unsuspecting traders.
While there can be no real substitute for market experience, knowing what to look out for when you’re trading can be an important step in keeping your account on track. So without further ado, here are the top five investment mistakes traders commonly make and how to avoid them, so you don’t become another statistic with a hole in their pocket.
Mistake #1: Overtrading
Overtrading occurs pretty easily, especially amongst new traders caught up in the excitement of getting involved in the market. Overtrading in share dealing terms is taking on too many separate positions to manage and cover with your capital base. Traders tend to be in the mindset of investing all their capital at once – this is madness. You need to make sure you take only couple of opportunities at one time so you can manage the research and position management burdens. Furthermore, by going on a capital splurge now, you’re potentially foregoing more profitable opportunities later.
Mistake #2: Lack of Diversification
While it’s important not to overtrade, it’s also important to make sure that your portfolio is diverse enough to withstand pressures on one or two markets without causing problems for your entire portfolio. Try to find the right balance between diversity and capital management, choosing lower value positions at first in order to provide a widest possible trading base within your capital budget. More diversified portfolios are more robust to market changes, and tend to be more solid foundations on which to build your trading account.
Mistake #3: Poor Market Assessment
Another key mistake to watch out for is insufficient or poor market assessment. It can be easy for traders to luck out on a couple of positions and then think they’ve got it all sewn up without the need for as much or as intensive ongoing research. Complacency leads to a lack of market research or just downright poor judgement, and when you’re risking your capital by trading on financial markets it’s imperative that you don’t allow these mistakes to feature in your account. Avoid getting caught up in the sense of accomplishment – the markets can pull the rug from under your feet at any time, so always treat them with respect and make sure you’re investing everything you can into identifying potentially viable positions.
Mistake #4: Giving Positions ‘A Chance’
A really easy habit to get into is giving losing positions a chance to recover. While generally traders want to be moving in the direction of the trend, sometimes markets reverse over the lifetime of a position and traders are left baffled as to why. No matter how irrational you think the markets are behaving, a losing stock is a losing stock, and it’s real money out of your capital account. As a result, you need to be ruthless with positions in determining whether they represent a worthwhile ongoing deployment of your capital, and those that are less forgiving of positions that slip away tend to develop a better control over their losses and liability.
Mistake #5: Not Calculating Risks
Another key mistake traders should look to avoid is not calculating the risks of a trade, or indeed not calculating them correctly. Traders should get into the habit of using risk to reward ratios, which project maximum returns and maximum losses from a transaction. Generally, in order to make a portfolio profitable the ratio needs to be at least 2 to 1 in favour of reward to risk, although some traders prefer the more discerning 3:1 model. Either way, traders need to think about the risks of getting involved in a particular market and attempt to quantify the risks posed by any potential trading opportunity.