As compared to investors, traders hold positions for smaller time periods and buy or sell securities more often. When the frequency of trading is high and positions are held for shorter durations, traders can inadvertently take decisions that can lead to huge losses and wipe out their investment capital. Below, we have listed a few common mistakes that new share traders make:
1. Failure to Contain Mounting Losses Knowing when to take a small loss and pull out of a bad deal rather than sticking around and letting the losses accumulate is one of the most defining qualities of successful traders. On the other hand, traders who are unable to find much success often, paralyzed by the shock of a bad deal, stick around hoping things would eventually work in their favor. When their trading capital is tied up for a long time in a losing trade, a delay in taking the right action may result in losses piling up and the trading capital getting depleted sooner than expected.
2. Not Implementing Stop-Loss Checks When it comes to stock broking, a failure to implement stop-loss orders can result in catastrophic losses. Novice traders can use stop-loss measures to contain their losses and prevent trading capital from depleting. There is always the risk of implementing stop orders on long positions at lower-than-specified levels if the security gaps lower. But in most cases, the benefits far outweigh the risks.
3. Not Following a Trading Strategy An experienced trader will have a well-defined strategy in place before starting to trade. They know their trajectory with exact entrance and exit points, the trade capital to be invested, and the maximum loss that can be sustained. A novice trader may not have such a strategy in place before he or she enters the share market. Or even if they do have one, the chances of them dropping their original plan if things go south are quite high.
4. Redeeming a Losing Position by Averaging Down (or Up) An investor who has a long term blue-chip investment plan can average down on a long position. On the contrary, it can prove to be very perilous for a trader who dabbles in risky securities. Some of the biggest known trading losses have occurred only because a trader kept adding to a losing position, and eventually the losses got so big that it became impossible to hold on to that position. Some traders tend to go short more frequently as compared to orthodox investors and try leveraging an advancing security to average up; this is an equally risky maneuver that novice traders can fall prey to.
5. Excessive Leverage That leverage is a double-edged sword is a very well-known cliché in the share market. This is because it can bolster returns from profitable trades and accelerate losses from losing trades. Share brokers who have just started out may be flattered on knowing how much of leverage they possess, but sooner or later, they may discover that it can also wipe out their trading capital in a flash. Take for example Forex trading; if they employ a leverage of 50:1, an adverse move of as low as 2 percent is enough to destroy their trading capital.
In order to make trading a profitable endeavor, beginner traders should avoid these commonly made mistakes.