Get rich and Do it Fast! The lure of the stock market is hard to beat. Day traders tend to focus on stories about blockbuster Initial Public Offerings (IPO’s), which turned regular people into millionaires overnight, or about having a secondary source of regular income to fulfill their dreams and ambitions! But before rushing full throttle into trading in the stock market, traders, especially novices, need to tread carefully.
The stock market is a highly volatile and unforgiving environment. It needs to be maneuvered with patience and knowledge. It is easy to know if you are right or wrong immediately; your trading results will speak for themselves. In this article, we are going to look at some of the most common mistakes that beginner day traders make and help them avoid burning their fingers in the stock market.
1. Lack of Knowledge of Financial Markets
A lack of knowledge of financial markets is dangerous. A day trader needs to be prepared and do the required due diligence before setting foot in trading. Do not just fire up your computer, link your trading account, and start trading. It requires time, dedication, and commitment to become a successful day trader. Reading a variety of books and other online resources can provide a good start. Learning from other people’s mistakes can enlighten you on some of the early pitfalls to avoid. Having a formal education background also helps.
2. Use Virtual Trading Platforms First
There are now plenty of virtual trading platforms, which are stock simulators. They have the same functional set up as a regular live trading platform without the risk of losing real money. These platforms allow you to trade virtually, letting you get a general investing education within safe confines of no real monetary loss. You also get well versed with underlying mechanics of trading like technical analysis, portfolio building, investment types, or trading views. Traders can also play mock games with other similar investors, fostering a sense of competition, while increasing their understanding and knowledge of a trading platform.
3. Not Being Specialized Enough
To do well in the stock market, day trading included, it helps to be specialized to maximize profit. Specialization could be in the different types of securities offered like stocks, options, commodities, index funds, or currencies. They could also be sector-specific like Oil & Gas, Telecommunications, Software, or Automotive. Being specialized provides you an edge, a degree of conviction in trading matters, and a better understanding of charts and tools that are available for analysis.
4. Being Too Emotional About Money
A lot of traders enter the market with the aim of instant returns and are very emotionally involved with their trades. Many times, traders are afraid of being branded “a loser” by their family or acquaintances and make bad decisions to overcome mistakes, thus compounding the issue.
5. Having No Plan
Many traders enter the market blindly without any specific plan in place. There should be a specific reason for executing a single trade. Many a time, guesswork can bring short term rewards, but without planning, traders are setting themselves up for long term disaster. As traders come across different scenarios, they need to formulate a plan which will help them mitigate risk and increase profits.
6. Inability to Stop Trading On Continuous Losses
Although this may seem trivial, many new traders cannot stop trading even upon being hit by a continuous losing streak. It could just be a bad day at the office, or it could mean that your strategy is not the right one. Whatever the case may be, at certain times, it is prudent to stop trading altogether, see if your portfolio is recovering over a specific time-frame and defer trading to another day.
7. Making Large Allocations for a Single Trade
Putting all your eggs in one basket is another common mistake made by day traders. Whether it is on intuition, a tip from someone in your family, or a single news report, you are taking a huge risk by allocating most of your funds on a single trade. Experience can help to increase the spread of capital allocation, but until you gain it, and are truly clear in your fundamentals, do not behave like a high roller at the casino.
8. Never Expecting the Unexpected
Most first-time traders only think about the big unexpected profit coming their way soon. However, they need to consider the volatility of any stock market. Behind every large windfall can lurk a big loss. Market crashes, events like the COVID-19 pandemic, or geopolitical fallout like trade wars can instantly wipe out gains in your portfolio.
9. Not Respecting Your Mistakes
No trader has become successful by not making mistakes. A successful trader is one who learns from his mistakes and respects them enough so as not to repeat them. Just by jumping from one loss-making strategy to another without understanding the inherent miscalculations is a futile exercise.
10. Not being Serious About Trading
Day traders need to understand the implications of not being serious about trading. Even if it a part-time job or a hobby, you need to treat it like a full-time occupation. By not being on top of things, traders run the risk of both monetary losses and lack of confidence. Day trading is not comparable to an online casino or being just another fun-filled activity because the repercussions of not being prepared are profoundly serious.
We only hear about so-called success stories in stock market trading. Rarely are big failures highlighted. It is easy for day traders to get lulled into thinking that the stock market is based on hunches, gut-feeling, and luck factor. Just knowing the ticker symbol or a using a ‘hot tip’ from an associate is not enough. Trading is a complicated and challenging activity.
In this article, we have listed some of the common mistakes made by novice day traders. But by being prepared, constantly studying the market, understanding your mistakes, and not looking for an instant pot of gold, every day trader can be successful in the stock market. It is easy to lose oneself in emotions and impulses, but by being disciplined, you are already halfway through your success story.