You need to be disciplined, and business-minded to be successful at online trading. Yet, we all make mistakes at some point because we are emotional by nature. Strong emotions like fear and greed can compel us to make bad decisions and forego rational thought.
Hence, you need to be aware of these online trading mistakes so that you can avoid them with greater ease.
1. Not Having a Plan
Many newbies enter a trade hoping that it will prove to be profitable. They are confident that the price will rise as long as they hang on to their stock. This is a surefire recipe for disaster. Such newcomers stubbornly hold on to their stocks until they have lost a major percentage of what they entered the trade with.
But why does this happen? Newbies and even some not so new traders are reluctant to admit defeat and take a loss. However, even the pros enter into bad trades all the time. What sets them apart from the rest is that they know when to move out of a bad trade when they see it. They don’t hope against hope that they will see a rise. They know that it is better to curtail losses and sell now at a loss instead of risking greater disaster.
This kind of thinking is also what turns a profitable trade into a losing one. When stocks do rise, rookies hope that the price will keep rising and thus hold on to their stocks although they should sell now at a profit while they still can. Then the inevitable happens. Their stocks fall and all profits get wiped out.
You need to have a plan and ask yourself specific questions before you start a trade.
- What price targets do I need to set?
- How much money should I reasonably risk?
- When will the trade move against me, and when should I sell when the trade does go against me?
You should answer these questions, plus you should set objective exit and entry points so that you can trade successfully.
2. Ignoring the Volume
You have information about the stock price as well as the volume. However, most beginners simply pay attention to the price and don’t give due regard to the volume even though it really matters. And that is a major mistake.
You might think that the price of the stock is moving higher and higher. Hence, it seems to be a good investment. But on close inspection, you might find that the volume behind this movement is too little. Price hikes are justified only if there is sufficient volume to validate it. Don’t buy stocks unless there is enough volume to give you the necessary confidence.
Bear one thing in mind. If the stock price moves but the volume is not much, then it is nothing more than hype. Avoid it at all costs.
3. Not Maintaining a Journal
You should learn something each day. This applies to everyone, not just traders. But for traders, this may be even more important because if you don’t learn your lesson, you could repeatedly make the same mistakes with disastrous results.
Don’t assume you will remember key findings. How often do we run into super useful insights and lose them because we thought that they were too easy to forget. There is so much going on in our lives that we forget the simplest things. So don’t think that you will remember it. Stop making excuses and write it down. Maintain a trading journal to write down every fact, lesson, insight and observation.
Even if you incurred losses, it might be a good day for you, provided you learn from mistakes and record them in your journal. The real loss is not preserving your findings in a well-maintained journal.
Keeping a journal is one of the best ways to increase your trading knowledge and become a good trader.
4. Risking Too Much on One Trade
Don’t get too greedy and overconfident at the same time. It’s not alright to risk too much of your account on a seemingly good trade. You may be tempted to commit most of your account to a trade you think is a winner. This is a costly mistake that many make, and it invariably results in a cataclysm.
You may love what you see in a chart, but remember that it is a game of probability. You can never be fully certain of any result. You can just be strongly confident of one thing – that events will inevitably prove your guess wrong at some point. No matter how confident you are, there is always the chance that the chart can go against you. And it happens more often than what most people think.
You need to go through scores of trades to find out what your win rate is. Once you determine your win rate with some precision, you can think of increasing your position size rationally.
5. Trusting Promoters
There is no such thing as the Easter Bunny, right? Yet many of us end up believing stock promoters when they start bluffing on the supposed windfall that you will make if you buy their stock. It does not matter what statistics and numbers these promoters throw at you. Don’t trust them. If you do believe them, then you might as well believe in the Easter Bunny or Santa Claus.
Whatever you do, don’t sign up for their email lists. Their job is to create hype, artificially inflate the price and trick you into throwing all your hard-earned money on their stocks so that they can make money at your expense. Stay away from them.
Reading carefully about the biggest online trading mistakes can help you steer clear of blunders that newcomers and even experienced traders keep making.