Trading mistakes will always cost you money, which means you have to do your level best to avoid them. Successful trading is not just about choosing the right stocks to trade. It also means that you should avoid the common blunders that might undo all the hard work you have done in the past. In 2020, when the stock markets collapsed due to the coronavirus, some investors hastily liquidated their portfolios because they panicked. However, the markets bounced back and even broke previous record high, rewarding traders who had planned well and showed patience.
Some of the common blunders you should steer clear of when stock trading are:
- No proper goals
When you are stock trading, you need to have proper goals because only then can you choose the best strategy for achieving them. This can be anything, such as creating a retirement fund, saving for your kid’s college fund, or even as a regular source of income. The key is to plan appropriately.
- Timing the market
Trying to time the market is a common blunder in stock trading. It is quite challenging and even the most seasoned investors often don’t do it right. You should note that most people are able to achieve success in stock trading because of correctly allocating their capital in the best stocks, rather than timing the market.
- Considering historical returns
When you have to decide which stocks to trade, it is not a good idea to simply rely on historical returns to make your decision. It is important to remember that past results are certainly not indicators of future performance. Your goal should be to develop your investment portfolio for the long-term and only consider historical performance as a risk indicator for the stock in question.
- Lack of patience
You should keep in mind that successful trading is 99% patience and 1% action. But, a number of people lack this patience and are constantly tinkering with their portfolio. If you want to achieve decent returns, you need to be disciplined, which means that you should think beyond the volatilities in the short-term and focus more on the growth potential of the market in the long-term. Market fluctuations will happen, but you need to be patient to get the returns you are after.
- Relying on your emotions
When you are making a trading decision, there are a number of biases at play. One of the most common blunders people make is relying on their emotions in a volatile market. If you are unable to wait for a couple of days to buy or sell a stock, then you are letting your emotions get in the way. Your investment decisions shouldn’t be rushed just because you ‘felt’ something. It is better to involve fewer feelings where stock trading is concerned.
- Over diversification
While diversification certainly comes in handy for mitigating your risks during stock trading, there is also a thing as over diversification. Go with assets that have a low correlation and different risk profiles, but don’t go too out because that can end up backfiring on you. Not only will it not make sense, it may not work either and you will end up suffering from losses either way.