If you have researched the basics of the stock market, you would have come across daunting statistics about how 95% of day traders lose more money than they make from the market. The numbers from official bodies such as the US SEC (Securities and Exchange Commission), ESMA in Europe, also suggest that the stock market is more likely to take money away from your pocket if you are trading without a plan.
These statistics are also an eye-opener to those who follow the crowd blindly and wonder what they did wrong as they reap losses. If you are new to the stock market arena, there are some rookie mistakes you should avoid at all costs. Some of them are obvious ones, yet beginners keep making these mistakes.
1. No Plan
The basic plan one should have before they start trading is to be in the top 5% of traders that consistently profit from the market, rather than belong in the remaining 95% that lose. And to do that, you should have a basic working plan at hand, even before making your first trade. This might come across as counter-intuitive for many people, as they believe the first step to getting started is to just begin something.
You might jump into a pool and expect to learn how to swim, but trading doesn’t work the same way. Here, “if you are failing to plan, you’re simply planning to fail.” So if you don’t have a plan and expect to learn things as you go along, don’t trade.
2. Taking Advice from Wrong Sources
Going with the stocks that a random YouTuber who claims to be an expert suggested? Chances are, the only thing of value that comes out of it is the lesson not to take advice from random people on the internet. The same goes for the unregulated Telegram and Discord groups that suggest stocks without any research backing them up.
A press release from the US SEC indicates that they have charged 8 social media influencers in a $100 million dollar stock manipulation scheme where the influencers pumped and dumped stocks on their followers. So if you are planning on relying on self-proclaimed experts on the internet, your portfolio will look red and negative in no time.
3. Emotional Decisions
The more you let your heart take the shots instead of your head, the more you blur the lines between trading and gambling. If you overtrade and take an oversized position after a winning streak and a revenge trade after losing, you are making decisions like an irresponsible gambler. The cliche, yet effective advice, is to always take emotions out of the equation when it comes to trading.
4. Underestimating the Math/Risks
So, if emotions should take a back seat, what should drive the decisions? The math. The trading plan, objective data analysis, risk management, and strategies are all essentially based on probabilities, ratios, and percentages. Beginners often ignore math as it feels restrictive and doesn’t align with their ideas about the stock market.
Most new traders pay the price of ignoring math early on, forcing them to choose between quitting and learning numbers. So learn to calculate essentials such as position sizing, risk-reward ratio, expectancy, recovery math, and breakeven win rate.
5. Not Using Stop Loss
One of the lethal mistakes new traders make is not setting up a stop-loss. They use ‘Hope’ as a strategy, where they believe their stocks will climb back up eventually after the dip. So, always set up stop-losses based on volatility, technical levels, or predefined risk limits.
Stop-loss levels range from conservative (8-15%), Moderate (5-8%), to aggressive (3-5%) levels. You can choose a range based on the volatility of the market you are dealing with and your risk tolerance levels. If you are dealing with highly volatile stocks like crypto, use aggressive levels of stop-loss.
6. Not Staying Up to Date
This is another factor that beginners underestimate. The stop-loss, numbers, strategies, and rules are all tools that you can use to get the best out of the understanding you have about the market. But if you do not have that ‘understanding’ about the market, these tools will be rendered useless.
The market moves in accordance with real events like changing economic policies of the government, hikes, recession, company decisions, cultural shifts, and much more. You must stay up to date with financial news to better predict the market’s movements.
Final Note
The stock market undoubtedly provides a great opportunity to create wealth. But a string of misinformed decisions can wipe out your capital in a short period of time. So, you must enter the market fully aware of its risks and pitfalls. We have provided you with the most common mistakes that beginners make, so that you don’t have to learn them the hard way. Needless to say, do your own homework on other fundamental concepts and terms so that the market will treat you better.
