Every time we see a plunge in the stock market, we feel the need to buy stocks. At least I do. The recent pull back encouraged me to buy a few stocks. As long as you buy stocks for investment, i.e. you hold on to it, it’s fine. In fact , to me, every slump is an opportunity for investment in stock market. But, when you try to trade in stocks then there are some precautions you must take.
Before reading rest of the article, do keep in mind that trading is a risky venture. I strongly discourage people who are in debt from in form of trading. As a rule of thumb, if you can’t generate enough saving to pay off your dues, you should’t spend any money in trading. In fact, at time, trading becomes as risky as gambling. especially when you day trade based on speculation alone.
Saying that, I’d assume that you have some disposable cash to try your luck at trading. I’d also assume that you understand a trading risk and possess enough knowledge about trading. In case you’re not, I have a series of post on trading, you can try reading those first.
This year we must correct trading behaviors that work against us. I’ve mapped out 3 areas that if corrected will increase your profits and improve your trading outcomes. I came about these three points due to the continuous errors I hear from people asking me what they are doing wrong and after a few questions and digging deeper, it’s always the same. So let’s dive into them;
Mistake number 1 – Trading without a trade plan
Imagine starting a business and pouring money into your store, products and employees without a business plan, how will do you think you will do? That’s what its like trading without a trade plan. 8 out of 10 businesses shutdown because of this so you’re trading must be treated as a business.
Look at it as when you’re buying a company’s stock you are investing in store products and you wouldn’t due this without knowing how much it cost, what you’re getting into, what its selling for and what you can sell if for and if you can sell it fast enough to make a positive return. A trade plan can provide structure for your trading to track and tweak areas to increase your return on investments. A few items to add to your plan or revisit;
- Profit goal – How much would you like to make yearly, monthly, weekly from trading? Know these figures and be realistic.
- How will you get there? – Will you trade options, long term and short stocks, OTC, futures, etc
- Risk tolerance – Ask yourself are you willing to risk $3 to gain 1 or $2 for 1 or even $5 for 1.
- Know the vehicles fundamentals, technical and news. You need to know how much debt a stock has, is it profitable, what are patterns that you can spot from history, do you spot trends and what is making it lose or make gains.
- Trading logs – I always tell traders their trading logs should be treated as if you are writing them for a third-party to review so that you have precise information such as wins, losses, entry and exit points and the who’s and the whys so that you can learn from your mistakes.
- Watchlist – This isn’t up for debate, you need a stock watchlist preferably in all sectors and use heat maps to see what’s hot or not for that day, week, etc.
Mistake number 2 – be in check before you enter your next trade
So many people trade because they love a product or service a company provides or baby sit a stock they entered which will only hinder your progress. Leave emotions at the door and trade because it’s a smart investment. At the top of trading psychology errors has to be getting into trading with the unrealistic approach of never losing and its time I burst your bubble, you will have losers just as Warren Buffet and I do.
The fear of losing will keep you from making gains big enough to cover your losses and getting faked out from reversals. The point is to make sure your gains are higher than your losses on whatever time frame you watch. A few pointers can be made to put your psychology in check;
- Don’t believe in the holy grail of indicators, strategies or robots
- Don’t double down on a trade to recover from your recent loss
- Leave emotions at the door and learn from mistakes
- Don’t blindly follow gurus and their track records, most are fluffed and can’t be verified
- Avoid pump and dump promotional stocks
Mistake number 3 – market timing
One of the most problematic for new traders and it stems from quite a few things but most likely from not having a watch list, trading with emotions, not current on business news or not being able to read charts. There is no such thing as perfect market timing and every stock or trading vehicle will present different obstacles but the key thing is to have a plan and know what to look for. Here are a few ways to improve market timing.
- Play Consecutive losers – Using hammers and shooting starts for potential breakouts of stocks that have lost more than 3-5 days is a great strategy for 10-15% gains and should be added to your tool box.
- Look at its Option Chains – usually when you see massive puts this usually indicates the masses and market makers are predicting the stock will be dropping or vice versa.
- Spread trading – buying spread will definitely keep you in the game longer and shouldn’t be overlooked.
- Fundamentals – Know when an instrument has earnings, and use this to your advantage.
- Chart trading – Learn to read charts with candles has it helps spot patterns and trends that can lead to major profit potential or disaster.
Mistake number 4 – not diversifying
Sticking to just one form of trading limit your earning potential and you become more prone towards a few set of market factors. That increases the trading rick. If you only trade in stocks then you are missing on the factors like other country’s economy, international currency demand, etc by missing out on Forex trading.
If you’re an expert trader, you should diversify in to stocks, commodities and Forex. Today many platforms offer single window to diversified trading. So you don’t have to switch between your trading platforms.
Investing into any market can be complicated and will take you on highs and lows but rewarding as long as you know how to correct you’re trading behaviors and make the right adjustments. Treat you’re trading as a business and diversify your portfolio, don’t only trade in one style, one sector or any one direction and don’t hold on to losers past your stop-loss.
Once the money starts to roll in continue find tuning your performance even if you find a way to squeeze and extra 2% per month at the end of the year you’ll have 24% more return on investment.
Paul @ The Frugal Toad says
I have a few individual stocks in my portfolio but most of my money is in index mutual funds. In my opinion the average equity investor doesn’t stand a chance against the markets primarily to these 3 things:1) the time required to truly learn fundamental and technical analysis is long 2) you need to be able to react quickly, something that most are unable to do since they are not full time investors 3) the risk is not worth the potential reward when the majority of professional money managers do not beat the market indexes.
Wiggles @ FirstYouGetTheMoney.com says
I tend to agree with Paul here. Most of my major savings are sitting in Vanguard index funds. A great book, although a bit technical, is “The Only Guide to a Winning Investment Strategy You’ll ever Need” by Larry Swedroe. this book details all the statistics of trying to beat the market.
With all that being said, it sure is fun to try!
Zee Hamdani says
Not diversifying is such a huge mistake, a mistake that caused a loved one thousands of dollars.
Always be smart when investing and i highly agree that you should always trade with a plan and only go into trading when you have somewhat knowledge of it. Directly jumping into it might make you lose some hard earned money.
Once I did that, although it was a part of experimentation and involved small amount of money, I almost lost everything in a day trade. Since then I am too cautious to trade.
it really a awesome post.thanks for sharing your experience with us it helps many people to survive and enjoy in college life.
How does college life become relevant to this post? Anyway thanks for your comment
Jordan Smith says
Thanks for the tips! Since I learned to use binary options for my regular online investments, I was confused with the many companies offering the services. I tried several of them, with demo account, to get to know what they offer. I’ve learned to diversify my stocks.
Stock diversification is no doubt essential but equally diversifying in to alternative forms of investment is equally essential. I never tried binary option though. Interested to know more on this