6 Trading Mistakes Every Beginner Should Avoid

Updated: Oct 7

Make Money: Don’t Lose Your Hard-Earned Money!


Over 90% of the traders lose money in the stock market” — this is the first statement I heard when I started learning to trade a decade back. I am sure most of the new traders will listen to this statement many times from pro-traders.


6 Trading Mistakes Committed by Beginners

But I have not seen any research paper that proves this number right. However, I feel the actual figure is much higher, with my experience being a trader and mentor.


Instead of wasting time over this debate, I would like to list a few significant reasons why people lose money in the market. I honestly admit that I have committed all the mistakes personally, lost money, and learned a lesson not to commit these mistakes to stay alive in the market.

Contents:

  • Gambling Mindset

  • Trading based on NEWS

  • Hopping across Different Strategies

  • Bad Money Management

  • Dealing with Penny Stocks

  • Averaging Down Strategy


Gambling Mindset


Many people consider trading is another form of gambling and take their trades without any logical reasons. In one of his articles, world-famous Trader Ed Seykota said, ‘Everybody gets what they want out of the Market.’


If a person looks for the thrill or excitement, I am sure the market will provide an enormous joy and excitement but at a HUGE COST!


My advice is to try some other method to satisfy your mind if you fall into this category.


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Trading based on NEWS


We have multiple news channels, newspapers that provide a lot of information on the stock market, economic conditions, and the impact of political decisions on the market.


However, most of the traders don’t have a magic box that accepts all this information and gives the actual price level as an output. Besides, I have also noticed big people have already deployed a dominant position before a piece of flashing news.


Expert traders consciously believe ‘Buy the Rumor, Sell the News’ theory. Whereas, others unconsciously believe, ‘Buy the News, Become Life-long Investor’ theory!



Hopping across Different Strategies


Do you know why Usain Bolt runs only in 100M and 200M sprints? Being the fastest athlete globally, why will he not choose to run in other categories such as 400M, 800M, 1500M, 5K, 10K, and other marathon events? It is to retain his focus on a small area and to excel in it.


Hence every trader must ask a question to themselves before they jump into another trading strategy:

“What is important for me in trading — making money or trading every pattern or system?”

“All you need is one pattern to make a living.” — Linda Raschke


Nobody can conclude the importance of one trading pattern like Linda Raschke with the above quote.



Bad Money Management


Many expect to make their first million in a week or even in a few months, which is quite unrealistic. Unrealistic expectation triggers people’s emotion, and they mess up with their money management. In simple terms, they take more risks for every trade.


I will explain the importance of money management with the help of a small game. Assume you have 100,000, and we will be playing head and tail game with a coin’s help. We will have simple rules for this game:


You can bet 1,000, 5,000 or 10,000 on single prediction.


If your prediction is correct, you will get twice the amount of your bet. For example, if you bet 10,000 and if your prediction is right, you will get 20,000, and if your prediction is wrong, you will lose your money.


From a long-run perspective, we can think of the outcome for 100 deals. Head and Tail is a simple game with a 50% probability for head and 50% probability of Tail.


So out of 100 trades, your prediction is wrong 50% of the time, and there are chances that you might get 10 failures successively. Do you know what can happen to your initial capital (which was 100,000) if you get 10 losses successively?



Importance of Money Management in Trading
I have two basic rules about winning in trading as well as in life: 1. If you don’t bet, you can’t win. 2. If you lose all your chips, you can’t bet. — Larry Hite


Dealing with Penny Stocks


Many people think it is effortless to make money with penny stocks because of two funny reasons:

  • They claim, the price cannot go to zero

  • The only way remaining for the price is to go upside

I have seen a handful of people who made some money with penny stocks. But there is a massive difference between a ‘Good Trade’ and ‘Good Trading.’


Besides, the failure rate is considerably higher with this type of trading, and our upbringing doesn’t support this.



Averaging Down Strategy


The logic of Averaging down strategy is simple. It is all about buying more shares when the price of a stock trades at a lower value.


For example:

Assume you have bought 10 shares at 100, if the price comes down to 50, then buying 20 shares at 50 will make the total buying average to 50.


Similarly, if the price falls to 25, buying 40 shares at 25 will make the average buying price 25.


Likewise, this kind of buying is created whenever the price goes below. When the price bounces up, you will make a profit.


The above theory looks effortless and attractive. But practically very difficult to make money with this strategy. Anyone will lose the entire capital if he had invested his entire capital in one such trade, and the price still goes further down.



Final Note


If you don’t get knocked down in boxing, there will be an opportunity to beat the opponent till the last round. Similarly, these 6 trading mistakes can create a big dent in your portfolio or the worst scenario; you might lose the entire portfolio.


If a person can avoid these 6 trading blunders, he will be in the game. From here, it’s all about running the winning trades, cutting losses quickly, and following proper money management rules are the foremost necessary elements to generate good returns from the stock market.


What is your opinion about these mistakes?


Do you think of any other reason to lose money in trading?


Please comment below.




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© 2020 by Indrazith Shantharaj.