/ meadbengtsen's Library/ Notes/ 10 mistakes of a novice трейдераstock market trader. What not to do
10 mistakes of a novice трейдераstock market trader. What not to do
from web site
what is investing and trading
1. Trading without a plan
The vast majority of novice traders start trading on the stock market without a plan. Regardless of whether you want to earn money on the exchange regularly or prefer a passive source of income, creating a trading plan plays an important role. Otherwise, investment and speculation turn into a losing gamble.
The only exception when you can do without a plan is to use a ready-made portfolio or the services of a financial adviser. In this case, you follow the developed investment strategy, so making mistakes will be minimal. However, to gain independence in the securities market, the first thing you need is a trading plan.
In it, the trader captures the following key points::
1) preferred trading style: scalping, intraday trading (intraday trading), swing trading (a position can be held for several days) or long-term investing;
2) analysis method: technical or fundamental;
3) selection of trading platforms:
- russian or foreign securities market;
- stock market, futures or foreign exchange market;
4) risk management (risk management): determining the maximum risk per trade, the allowable drawdown on the deposit per month, the ratio of profit to risk for one position;
5) rules for entering a trade and other aspects.
Following a trading plan allows you to make transactions systematically and deliberately. Over time, your skills will improve, increasing your trading efficiency. You will learn to understand whether you made a mistake or the market simply did not behave as in most cases.
It is also a mistake for beginners to open a "random" (thoughtless) trade. Any purchase or sale of securities should be made after analyzing the situation in accordance with the trading plan. Before making a trade, a forecast is made that answers the following questions::
- Why is the price more likely to test this or that level? Factors for and against.
- At what prices to record profit or loss and why?
Even a novice trader needs to understand why the chances of a successful trade are "on their side".
2. Trading without preparation
Before you start trading with real money, analyze a certain number of charts. Observe the price behavior by using technical indicators and identifying support and resistance levels. Try to find different patterns (patterns, Price Action, or other patterns) on charts with different timeframes. Understanding technical analysis is useful not only for speculators, but also for investors, for whom it is equally important to open and close a trade at more favorable prices.
If your trading style is "swing trading", you also need to understand the impact of news on the price. For medium-and long-term investments, the fundamental analysis of the company and industry analysis are "connected". At the same time, understanding what is happening in global markets in general will not harm any trader. Unless for a scalper, such information will be completely useless.
After you see the first positive results of your forecasts, you can start thinking about opening a real account. There is another option: first try your hand at a demo account.
3. Overconfidence
Getting the first income on the stock market, novice traders often have a false idea of the simplicity of earnings. The problem becomes especially acute if the trader has earned a large amount of money.
It is not uncommon for a novice investor or speculator to mistakenly believe that they can benefit from almost any price movement. Overconfidence leads to opening a trade without the necessary analysis with a "cool" head. When a position becomes unprofitable, the situation is compounded by the desire to recoup, usually leading to even greater losses.
A similar effect occurs for novice car drivers: after some time after getting used to driving, the driver becomes overly confident in their abilities, starting to drive the car faster and more aggressively. However, due to the lack of experience during this period of driving, the probability of an accident increases sharply, which is confirmed by statistics.
The other extreme is excessive trust in third-party sources. You can not completely rely on someone else's, even expert, opinion. Analyst recommendations can be used to confirm or "fit" your own forecast, but nothing more.
It is impossible to learn systematic trading if you regularly follow forecasts from various sources. Testing other people's ideas on your own money is a high risk of capital loss. If you are not ready to make informed decisions about trades, then you are not prepared enough for independent trading.
4. Unwillingness to fix losses
When making a trade, you expect the price to rise or fall. In case of an unfavorable price change, it is necessary to fix the loss in time, otherwise the losses increase and become uncontrollable. As a result, the growing minus can simply "get" you.
Let's assume that the price has reached the value at which the loss should be recorded. You may think that the market situation will change soon, and the price will turn in your direction. But it is better to limit losses in time and not "tolerate" the growing negative. Holding an unprofitable position does not guarantee that the price returns to the initial value and prevents you from making new promising trades. At the appropriate time, you can re-open the position (re-enter the trade), if the price forecast remains the same.
A reliable solution to the problem of timely and quick exit from a losing trade is to place a stop order at the same time as opening a position.
Stop requests. How to set them and whether they are suitable for all investors
5. More risk means more money
The higher the risk, the higher the earning potential. But the flip side of the coin is that when the risk increases, possible losses also increase. It is not for nothing that experienced traders usually allocate no more than 1-5% of the total capital to one position.
The maximum risk can be justified only in one case — when the deposit is "overclocked". Due to the full use of "leverage", a professional trader increases the risk to the limit and maintains it at the maximum level to multiply a small deposit to an acceptable size. At the same time, during the period of" acceleration " of the deposit, even a small unfavorable price change entails serious losses, up to the loss of all capital. Therefore, the strategy can only be used by experienced speculators who were able to show a good financial result with a low level of risk for a long time (from a year).
6. Fighting the trend
Let's assume that a stock is dominated by an uptrend or a downtrend. By opening a position in the opposite direction from the trend, the investor assumes unjustified risks. Attempts to "catch" a trend reversal simply exclude making a profit in the long run, since in most cases such transactions will be unprofitable.
Don't try to "short" the stock in an uptrend. If you feel that the decline will end soon, wait for reliable technical signals to appear for a trend reversal. Even if the company is attractive for fundamental reasons, a persistent falling trend can continue for a long time.
It is necessary to remember the key point: a strong fall in the instrument does not guarantee that the price will not go even lower. Instead of trying to take part in the formation of the "bottom" of the market, buy securities after the price has confidently turned around. With experience, you will learn to identify the moment of a trend change earlier.
Below is an example of an uptrend. After the price stops or corrects downwards, it may seem that the trend is about to reverse. Nevertheless, quotes continue to grow almost continuously, changing the trend only after the breakdown of a strong price level.
7. Position averaging
Position averaging is a reduction in the average price of a position by purchasing additional shares at a lower price. That is, if after the purchase of securities, their price begins to decline, the additional purchase of shares reduces the average price of the entire position. The principle works similarly for a short position (selling an asset), only the securities are sold at a higher price.
Never use this method, especially if you are not an experienced trader. Unsuccessful investments should be sold immediately — this way you fix the loss, not allowing it to grow.
The only case in which averaging can be justified is long-term investments. By buying shares of a stable company and holding them for more than a year, the investor can buy shares at a lower price, which increases the potential profit. But since the potential loss also increases (in the event of a further price drop), the strategy has the opposite side of the coin.
In order, to avoid averaging, a number of investors use technical analysis. It allows you to take into account the current market sentiment and enter the deal at a better price. In this case, a drop in the price below a certain level tells the trader that he misinterpreted the attractiveness of the securities. In this case, it is easier to fix the loss without making the situation worse by averaging.
Is averaging in a falling market a blunder or a successful strategy?
8. Unrealized gain or loss
There is a misconception that a loss (or profit) is not "real" if the position is not yet closed. However, your portfolio is worth exactly what you can sell it for on the market right now. An unfixed loss is the same loss.
Many beginners and even трейдерыexperienced traders are reluctant to close a losing position because they are unwilling to accept that the price has gone against their forecast. Here there are various emotions, stubbornness, pride, which prevent you from calmly fixing losses. As a result, the loss continues to grow further without any guarantee that the price will return to its previous level. This can lead to excessive losses that are difficult to make up for later. It is important to realize that if the stock has fallen by 50%, then to reach the initial value, they need to grow by 100%.
9. "Favorite" promotions
For various reasons, some investors select stocks that they find particularly attractive. You do not need to do this, because in the event of a collapse of quotations, it will be difficult to get rid of them in time. In general, a growing stock can become unprofitable at any time. As long as you focus on your personal "favorites," you're missing out on making money on fast-growing securities.
It is necessary to understand that the shares of an "excellent" company may well not grow in the short term. Often promising stocks show mediocre dynamics of the exchange rate, revealing the value only on the long-term horizon. This is because fundamental analysis does not take into account current market conditions, including investor interest in buying certain securities.
10. Use of borrowed funds
Never add credit money to your brokerage account. The loan requires the regular repayment of direct investments, which exerts psychological pressure. You are haunted by the idea of the need for constant earnings from the exchange. But this is impossible, because the market does not '' distribute " money according to your personal desire, but provides an opportunity to earn money during favorable periods of time.
Free capital should be used in trading on the stock exchange. Moreover, if you adhere to high risks (for example, when trading futures with leverage), then psychologically you should be prepared to lose most of these funds due to unforeseen circumstances. Never trade with last-minute or borrowed money.
If you follow these 10 rules, the chances of success are greatly increased. If you love trading and devote enough time to system trading and error analysis, sooner or later you will find your own path to profit. The main thing is not to consider the market only as a source of income, otherwise failures will not be perceived as an experience, but will only lead to disappointment.
1. Trading without a plan
The vast majority of novice traders start trading on the stock market without a plan. Regardless of whether you want to earn money on the exchange regularly or prefer a passive source of income, creating a trading plan plays an important role. Otherwise, investment and speculation turn into a losing gamble.
The only exception when you can do without a plan is to use a ready-made portfolio or the services of a financial adviser. In this case, you follow the developed investment strategy, so making mistakes will be minimal. However, to gain independence in the securities market, the first thing you need is a trading plan.
In it, the trader captures the following key points::
1) preferred trading style: scalping, intraday trading (intraday trading), swing trading (a position can be held for several days) or long-term investing;
2) analysis method: technical or fundamental;
3) selection of trading platforms:
- russian or foreign securities market;
- stock market, futures or foreign exchange market;
4) risk management (risk management): determining the maximum risk per trade, the allowable drawdown on the deposit per month, the ratio of profit to risk for one position;
5) rules for entering a trade and other aspects.
Following a trading plan allows you to make transactions systematically and deliberately. Over time, your skills will improve, increasing your trading efficiency. You will learn to understand whether you made a mistake or the market simply did not behave as in most cases.
It is also a mistake for beginners to open a "random" (thoughtless) trade. Any purchase or sale of securities should be made after analyzing the situation in accordance with the trading plan. Before making a trade, a forecast is made that answers the following questions::
- Why is the price more likely to test this or that level? Factors for and against.
- At what prices to record profit or loss and why?
Even a novice trader needs to understand why the chances of a successful trade are "on their side".
2. Trading without preparation
Before you start trading with real money, analyze a certain number of charts. Observe the price behavior by using technical indicators and identifying support and resistance levels. Try to find different patterns (patterns, Price Action, or other patterns) on charts with different timeframes. Understanding technical analysis is useful not only for speculators, but also for investors, for whom it is equally important to open and close a trade at more favorable prices.
If your trading style is "swing trading", you also need to understand the impact of news on the price. For medium-and long-term investments, the fundamental analysis of the company and industry analysis are "connected". At the same time, understanding what is happening in global markets in general will not harm any trader. Unless for a scalper, such information will be completely useless.
After you see the first positive results of your forecasts, you can start thinking about opening a real account. There is another option: first try your hand at a demo account.
3. Overconfidence
Getting the first income on the stock market, novice traders often have a false idea of the simplicity of earnings. The problem becomes especially acute if the trader has earned a large amount of money.
It is not uncommon for a novice investor or speculator to mistakenly believe that they can benefit from almost any price movement. Overconfidence leads to opening a trade without the necessary analysis with a "cool" head. When a position becomes unprofitable, the situation is compounded by the desire to recoup, usually leading to even greater losses.
A similar effect occurs for novice car drivers: after some time after getting used to driving, the driver becomes overly confident in their abilities, starting to drive the car faster and more aggressively. However, due to the lack of experience during this period of driving, the probability of an accident increases sharply, which is confirmed by statistics.
The other extreme is excessive trust in third-party sources. You can not completely rely on someone else's, even expert, opinion. Analyst recommendations can be used to confirm or "fit" your own forecast, but nothing more.
It is impossible to learn systematic trading if you regularly follow forecasts from various sources. Testing other people's ideas on your own money is a high risk of capital loss. If you are not ready to make informed decisions about trades, then you are not prepared enough for independent trading.
4. Unwillingness to fix losses
When making a trade, you expect the price to rise or fall. In case of an unfavorable price change, it is necessary to fix the loss in time, otherwise the losses increase and become uncontrollable. As a result, the growing minus can simply "get" you.
Let's assume that the price has reached the value at which the loss should be recorded. You may think that the market situation will change soon, and the price will turn in your direction. But it is better to limit losses in time and not "tolerate" the growing negative. Holding an unprofitable position does not guarantee that the price returns to the initial value and prevents you from making new promising trades. At the appropriate time, you can re-open the position (re-enter the trade), if the price forecast remains the same.
A reliable solution to the problem of timely and quick exit from a losing trade is to place a stop order at the same time as opening a position.
Stop requests. How to set them and whether they are suitable for all investors
5. More risk means more money
The higher the risk, the higher the earning potential. But the flip side of the coin is that when the risk increases, possible losses also increase. It is not for nothing that experienced traders usually allocate no more than 1-5% of the total capital to one position.
The maximum risk can be justified only in one case — when the deposit is "overclocked". Due to the full use of "leverage", a professional trader increases the risk to the limit and maintains it at the maximum level to multiply a small deposit to an acceptable size. At the same time, during the period of" acceleration " of the deposit, even a small unfavorable price change entails serious losses, up to the loss of all capital. Therefore, the strategy can only be used by experienced speculators who were able to show a good financial result with a low level of risk for a long time (from a year).
6. Fighting the trend
Let's assume that a stock is dominated by an uptrend or a downtrend. By opening a position in the opposite direction from the trend, the investor assumes unjustified risks. Attempts to "catch" a trend reversal simply exclude making a profit in the long run, since in most cases such transactions will be unprofitable.
Don't try to "short" the stock in an uptrend. If you feel that the decline will end soon, wait for reliable technical signals to appear for a trend reversal. Even if the company is attractive for fundamental reasons, a persistent falling trend can continue for a long time.
It is necessary to remember the key point: a strong fall in the instrument does not guarantee that the price will not go even lower. Instead of trying to take part in the formation of the "bottom" of the market, buy securities after the price has confidently turned around. With experience, you will learn to identify the moment of a trend change earlier.
Below is an example of an uptrend. After the price stops or corrects downwards, it may seem that the trend is about to reverse. Nevertheless, quotes continue to grow almost continuously, changing the trend only after the breakdown of a strong price level.
7. Position averaging
Position averaging is a reduction in the average price of a position by purchasing additional shares at a lower price. That is, if after the purchase of securities, their price begins to decline, the additional purchase of shares reduces the average price of the entire position. The principle works similarly for a short position (selling an asset), only the securities are sold at a higher price.
Never use this method, especially if you are not an experienced trader. Unsuccessful investments should be sold immediately — this way you fix the loss, not allowing it to grow.
The only case in which averaging can be justified is long-term investments. By buying shares of a stable company and holding them for more than a year, the investor can buy shares at a lower price, which increases the potential profit. But since the potential loss also increases (in the event of a further price drop), the strategy has the opposite side of the coin.
In order, to avoid averaging, a number of investors use technical analysis. It allows you to take into account the current market sentiment and enter the deal at a better price. In this case, a drop in the price below a certain level tells the trader that he misinterpreted the attractiveness of the securities. In this case, it is easier to fix the loss without making the situation worse by averaging.
Is averaging in a falling market a blunder or a successful strategy?
8. Unrealized gain or loss
There is a misconception that a loss (or profit) is not "real" if the position is not yet closed. However, your portfolio is worth exactly what you can sell it for on the market right now. An unfixed loss is the same loss.
Many beginners and even трейдерыexperienced traders are reluctant to close a losing position because they are unwilling to accept that the price has gone against their forecast. Here there are various emotions, stubbornness, pride, which prevent you from calmly fixing losses. As a result, the loss continues to grow further without any guarantee that the price will return to its previous level. This can lead to excessive losses that are difficult to make up for later. It is important to realize that if the stock has fallen by 50%, then to reach the initial value, they need to grow by 100%.
9. "Favorite" promotions
For various reasons, some investors select stocks that they find particularly attractive. You do not need to do this, because in the event of a collapse of quotations, it will be difficult to get rid of them in time. In general, a growing stock can become unprofitable at any time. As long as you focus on your personal "favorites," you're missing out on making money on fast-growing securities.
It is necessary to understand that the shares of an "excellent" company may well not grow in the short term. Often promising stocks show mediocre dynamics of the exchange rate, revealing the value only on the long-term horizon. This is because fundamental analysis does not take into account current market conditions, including investor interest in buying certain securities.
10. Use of borrowed funds
Never add credit money to your brokerage account. The loan requires the regular repayment of direct investments, which exerts psychological pressure. You are haunted by the idea of the need for constant earnings from the exchange. But this is impossible, because the market does not '' distribute " money according to your personal desire, but provides an opportunity to earn money during favorable periods of time.
Free capital should be used in trading on the stock exchange. Moreover, if you adhere to high risks (for example, when trading futures with leverage), then psychologically you should be prepared to lose most of these funds due to unforeseen circumstances. Never trade with last-minute or borrowed money.
If you follow these 10 rules, the chances of success are greatly increased. If you love trading and devote enough time to system trading and error analysis, sooner or later you will find your own path to profit. The main thing is not to consider the market only as a source of income, otherwise failures will not be perceived as an experience, but will only lead to disappointment.
