Stock market trading is a very tempting way for people who want to make a profit on a regular basis. However, the market is extremely volatile, which makes it more challenging, especially if you are a novice trader. If you wish to avoid losses, read the article below to avoid the mistakes.
Things to Avoid While Trading
If you are considering online trading in the stock market, try to avoid the mistakes mentioned below to avoid losses.
1. Trading Without a Trading Plan
Every trader should have a trading plan. If they don’t, it’s time to create one. A good place to start is by asking why they’re trading in the first place. For example:
- Are they looking to earn some extra money alongside their regular job?
- Do they want to make a full-time career out of trading?
- Or is it just a challenge they’re interested in?
Whatever the reason, these goals will shape the way they approach trading.
Traders should think about what they really want from trading and then figure out the steps to achieve it.
2. Avoid Emotional Trading
Opening a long position only to watch the stock price drop can be frustrating, as is missing out on a stock you’ve been tracking. These situations often stir up emotions like anger, fear, and anxiety, leading traders to make impulsive decisions.
For instance, when a long position loses value, some traders might keep buying more at lower prices or even start shorting the stock, hoping to break even. Similarly, missing out on a big move may lead them to jump in too late—right when the trend is about to reverse.
Remember, markets go up and down in cycles. Instead of reacting in panic, focus on managing your risk.
3. Avoid Overtrading
Overtrading is when the person trades too often without any justified reasons and in this case, the chances of making losses, facing high costs, or experiencing anxiety are quite high.
Instead of trading frequently, focus on quality trades with strong potential. For example, if a trader buys and sells multiple stocks daily based on minor price changes, they might end up paying high brokerage fees and make losses due to impulsive decisions.
It’s usually better to hold onto a few well-researched trades than constantly trading for small profits.
4. Not Using a Stop-loss Order
Not using a stop-loss order can lead to significant losses in trading.
A stop-loss is a preset level where you automatically sell an asset if its price drops to that point, helping you limit potential losses.
Without it, traders might hold onto a losing position, hoping the price will recover, which can lead to even greater losses. For instance, imagine buying a stock at ₹100 with the hope it will rise, but it starts falling. If you set a stop-loss at ₹90, the stock would automatically sell when it hits ₹90, capping your loss to ₹10 per share.
But without this stop-loss, you might end up holding the stock even if it falls to ₹70 or lower, increasing your losses significantly.
5. Overleveraging
Overleveraging means using borrowed money to increase your trade size, which can amplify both profits and losses. For example, if you trade with 100:1 leverage, a small market drop of just 1% can wipe out your entire investment.
The thing to remember is that while high-leverage options like 10:1, 50:1, or even 400:1 are available (depending on your location), you don’t need to use the maximum.
It’s safer to use lower leverage to manage risk effectively.
Also read about Dow Jones FintechZoom
Conclusion
As a short-term trader, you can rely on the best trading app on the market to get an overview of the market scenario. However, research properly and start trading by taking away emotions and unrealistic expectations. Trading is just like business deals, so biases and fear of risk should be sidelined. If you can overcome these flaws, the stock market will seem to be more enjoyable with more profits and high returns.
