- Committing avoidable blunders while conducting transactions can harm both investors and traders.
- The harm may be in different magnitudes since investors deal in stocks, exchange-traded funds, and other longer-term holdings, and traders are usually involved in positions for shorter periods, and a more significant number of transactions.
- Trading without any concrete plan, chasing after current performances, and blindly following mechanical systems, are some of the most common blunders.
The prospects of making money generally entice people into stock market investing and trading. However, early losses due to common mistakes can be a quick turn-off. Committing avoidable blunders while conducting transactions can harm both investors and traders. The harm may be in different magnitudes since investors deal in stocks, exchange-traded funds, and other longer-term holdings, and traders are usually involved in positions for shorter periods and a more significant number of transactions. So, both investors and traders must cut down on their mistakes to make most of their trades.
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Five common trading blunders investors and traders must avoid:
Trading without any concrete plan
Entering the trading world without any concrete plan is unacceptable. A robust and well-defined plan is not only needed by newcomers but also by experienced parties. A trader, particularly, must know the exact entry and exit points in a trade. Similarly, he must have a clear idea about the available capital to invest and the maximum loss he is willing to absorb. When you operate in the atmosphere of uncertainty, every step forward must be taken with a proper caution and plan.
Only dumbs run after current performances
It’s good to keep your eyes and ears open while trading and learning from outperformers. However, chasing asset classes, strategies, managers, and funds, based on current strong performance, is another blunder. Who knows what led to this robust performance. It’s also possible that a particular cycle is nearing its end. It’s also possible that the asset class is now attracting dumb money, while smart money has quietly moved out.
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Risk can’t be ignored
A good investor and trader should never lose the sight of the risk. He is always averse of risk-aversion. Your plan should mention your risk-aversion capacity. All investment instruments have risks of varying degrees associated with them. Experts advise to never invest more than you can afford to lose. The investors with low risk-taking capacity could focus more on the blue-chip stocks and maintain distance from volatile growth and startup companies’ shares.
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Don’t blindly follow mechanical systems
With the advancement in technology, most investors and traders have adopted online trading platforms to guide them in research, and fundamental and technical analysis. It helps them to improve their strategies. However, relying too much on machines is not appreciated much by the experts and stock market veterans. Instead, you must fully understand and depend on your capabilities while making the final decision. Blindly following mechanical systems while executing trades means that you are unsure about what you are doing.
Not restricting losses with stop-loss
It’s always advised to use stop-loss orders since they help limit losses amid an adverse movement in the stock markets. Stop-loss orders execute automatically once the defined parameters are met, and save you from further losses. Even as there is a risk of a stop-loss order on long positions getting executed below the specified levels, should the security suddenly gap lower. Still, the benefits of the stop-loss orders exceed the risk of stopping at an undecided price.
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