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To date, my biggest stock trading mistake was to put all eggs in one basket, meaning I invested in a single company again and again, Washington Mutual to be particular, while the price was falling down. When the WaMu was declared bankrupt I had a major loss. I attribute the loss to speculation and over confidence – too big to fail confidence. I had a dream of being rich with WaMu shares, one day!
Although practically everyone who decides to start trading goes in with dreams of success, there are plenty of common mistakes that traders of all levels make. Discover these four deadly stock trading mistakes to make sure you know what not to do when trading to increase your chances of success.
1. Not Having a Plan
One of the most common mistakes in trading is not having a plan, and unfortunately, it can be a pretty deadly mistake, as well. When you’re dealing with the stock market, having a plan is almost always necessary to be successful and make a profit. Luckily, though, creating a plan for trading isn’t very difficult.
To create a trading plan, you should compose a document that details your entire trading strategy. In this document, you will want to include your mission statement, pre-market preparation, trade entry rules, trade exit rules, money management rules and post market actions.
Once you have your plan created, make sure you are committed to it, as this will be the only way to figure out if any problems that arise have to do with your plan and not with your execution of it.
For me, the plan is focus on dividend growth. I buy shares (but mostly index funds I buy) of big companies with good dividend paying history. Also, I buy stocks only for long-term.
(Related – 10 best practices for dividend investing)
2. Changing Your Plan
Having a trading plan is, of course, a huge key step into being successful at trading. However, changing your plan can also be incredibly destructive a lot of times. It is important to remember that there is no plan that is guaranteed to win, no matter how much you might wish there was.
You may find that you had a loss early on in your plan and feel like it isn’t working, but in reality, it is almost guaranteed you will encounter a loss at some point.
It is also common for a run of losses to happen at some point, as well. If a loss happens, you must understand this is something that is to be expected and not a sign that you should change your plan right away. It will take time to discover how well your plan is or isn’t working.
(Related – How to Control Stock Trading Impulses)
3. Not Putting in Enough Effort
A very deadly mistake in stock trading is simply not putting in enough effort. When people begin to trade stocks, many are looking – or at the very least hoping – that they strike it big without much work.
However, it is undeniable that those that are the most successful at trading are ones that put in the right amount of effort. It is important to realize it takes time to learn the ins and outs of the stock market and commitment to becoming a skilled trader.
So, whether you are new to trading or have been at it for a little while, keep in mind that the amount of effort you put into it will likely determine the amount of success you can possibly achieve.
(Related – Setting your Mind Before starting with Online Stock Trading)
4. Poor Money Management Skills
Knowing how to manage money is incredibly important if you wish to be successful at trading. It is incredibly important to know the maximum losses you can handle in a single day or in a single trade in order to turn a profit.
To make sure you are giving yourself the best chances at success with stocks, you want to make sure you know how to properly manage your money for trading, include this in your plan and follow it precisely, or else your trading career could be doomed.
(Related – How Can I Time Stock Market Correctly?)
Readers, if you’re a trader or used to be a trader, what other advice you may like to give. Also feel free to share your mistakes and let others take lessons from them.
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There is another one to keep in mind: Managing ones emotions. Investing has a lot to do with ones temperament and emotions as it has to do with money. Manage them and you are one step ahead of the game.
Yes off course same goes with impulse shopping. That’s why I linked to my earlier post – how to control stock trading impulses. You read about a stock’s potential somewhere you immediately try to buy it, thinking this might go up very soon.
Trading is not something I dabble in because I think it’s more likely to hurt you as an investor than to help. I much prefer focusing on implementing a long-term strategy rather than trying to maximize short-term returns. But no matter which way you go, I think the principles you state here largely apply, especially the advice to have a written plan and to stick with it through the ups and downs.
Matt I am in the same boat, I stopped trading these days, it’s too risky for a day job holder who doesn’t have much time for research and study stocks.
Putting all your eggs in one basket is a huge mistake. I had too much employee stock at one point, but that has been remedied.
Panic selling is another problem that investors have. Avoid that and you’ll do better in the long term.
Yeah right.. ask me about all eggs in one basket 🙂 Lost too much money already. yes panic selling is another deadly sin but, fortunately I never did that.
I used to think I could time the market and make more money trading individual stocks. I got slapped down hard in 2000. I came around to the boglehead method of setting a good asset allocation with the correct risk for my age, buying low-cost passive index funds, and staying the course. It worked very well over the 2008 recession. I didn;t have nearly the losses I did in 2000, and my assets recovered much quicker than in 2000-2003. I found that like your trading plan, an investment policy statement is helpful for rebalancing and staying the course during large market movements.
I feel that all of the high speed trading and automated systems working in the stock market might start affecting manual traders. So i’ve been avoiding the market lately.
The only thing i would consider buying now are index funds. But, i do prefer real estate over trading the market.
Likewise – I’ve tried various trading strategies over the years, and have been slapped hard every time, most notably with Cisco in the first dot com implosion.
At this point, I either go index fund or dividend growth stocks. The current economic climate is too unpredictable for me to stomach actually paying attention to. It’s so disconnected to any basis in reality that it defies logic. Might as well throw darts or use a random picker.
Good points! I am not a trader. In fact, I am a buy and hold kind of investor.
its a good tactic to follow, lesser risk compared to trading.
I’m letting index funds to all the work for me currently. Most professional financial planners can’t beat them, so why would I even try, with my very limited experience?
I have a couple of index funds, yes risk is limited while still earning decent return.
Those are really true. Especially #1, having a plan or a goal in mind before you start investing can really be beneficial for you in a lot of ways.
yes, its definitely true, as with everything else, a proper plan control a lot of negatives.
I go for #1 and 2. Planning is very crucial when it comes to money matters especially investing. Having a plan and doing your best to stick to it.
I don’t think we could ignore one. I think you meant you’d put more focus on #1 and #2
I’ve done something similar in the past. Putting nearly all my capital in one stock. Then watched it crash and burn.
I got suckered into believing the story behind the stock rather than focusing on the numbers, the risk and the fact that what I had believed in was nothing but a house of cards waiting for a breath of wind to blow it down.
Dont worry – there are very few people who havent done this at least once.
we all make mistakes. I did , you did. Now it’s our responsibility to speak about the experience and prevent others from doing the same.
I have some points which i want to share with you people, stock plan benefits-
1.Sell stock purchase plan shares,
2.Exercise the stock options
3.Learn when ESPP shares are purchased
4.Know if I need cash to exercise my stock options or sell company stock.
Great article. I highly agree with this line “only invest money that you can afford to lose”. About 5 years ago when I just started Stock trading I had done lots of silly mistakes. After lots of ups and downs, I’ve learned some valuable lessons and now stock trading is my second source of income.
BTW thanks for sharing.