10 mistakes of a beginning trader on the stock market. What not to do

1. Trading without a plan

The vast majority of beginning traders start trading on the stock market without a plan. Whether you want to make money on the stock market on a regular basis or prefer a passive source of income, creating a trading plan is important. Otherwise, investments and speculations turn into a loss-making gamble.

The only exception when you can do without a plan is when you use a ready-made portfolio or the services of a financial advisor. In this case, you follow a developed investment strategy, so mistakes will be minimal. However, to gain independence in the securities market, the first thing you will need is a trading plan. In it, the trader fixes the following key points:

1) preferred trading style: scalping, intraday trading (intraday trading), swing trading (a position can be held for several days) or long-term investing;

2) method of analysis: technical or fundamental;

3) selection of trading platforms:
– Russian or foreign securities market;
– equity market, derivatives market or foreign exchange market;

4) risk management (risk management): determination of the maximum risk per transaction, allowable drawdown per deposit per month, profit-to-risk ratio for one position;

5) rules for entering a deal and other aspects.

Following a trading plan allows you to make transactions systematically and thoughtfully. Over time, your skills will improve, increasing the efficiency of trading. You will learn to understand if you have made a mistake or if the market has simply behaved differently than in most cases.

It is also a mistake for beginners to open a “random” (ill-considered) transaction. Any purchase or sale of securities should be made after analyzing the situation in accordance with the trading plan. Before the transaction, a forecast is made, which answers the questions:

– Why is the price more likely to test this or that level? Factors for and against.
– At what prices should I take profit or loss and why?

Even a novice trader needs to understand why the odds of a successful trade are “on his side”. You can read more about how and where to start trading on the stock exchange in the reviews:

I am new to the stock market. Where to start

How to start trading on the stock exchange. Instructions for beginner traders

How to form an investment portfolio

Trading styles. How to determine the position holding period

2. Trading without preparation

Before you start trading with real money, analyze a certain number of charts. Observe price behavior using technical indicators and identifying support and resistance levels. Try to find different patterns (figures, Price Action or other patterns) on charts with different timeframes. Understanding technical analysis is useful not only for speculators, but also for investors, for whom it is equally important to open and close a trade at more favorable prices.

If your trading style is swing trading, you also need to understand the impact of news on the price. In medium and long-term investing, fundamental analysis of the company and industry analysis are “plugged in”. At the same time, understanding what is happening in the world markets as a whole will not harm any trader. Except that for a scalper such information will be completely useless.

After you see the first positive results of your predictions, you can think about opening a real account. There is another option: try your hand on a demo account first. Useful articles on technical analysis:

How to determine support and resistance levels

All technical indicators of the QUIK trading system

The most common figures of technical analysis

Price Action candlestick analysis method – Trader’s Assistant

3. Overconfidence

Getting the first income on the stock market, beginning traders often have a false idea about the simplicity of earning money. The problem becomes especially acute if the trader has earned a large sum of money.

It is not uncommon for a novice investor or speculator to mistakenly believe that they can capitalize on virtually any price movement. Excessive self-confidence leads to opening a deal without the necessary analysis with a “cold” head. When a position becomes unprofitable, the situation is aggravated by the desire to win back, usually resulting in even greater losses.

A similar effect occurs in novice drivers of passenger cars: after some time of getting used to driving, the driver becomes overconfident and starts driving faster and more aggressively. However, due to the lack of experience, it is during this period of driving that the likelihood of an accident increases dramatically, as statistics confirm.

The other extreme is over-reliance on outside sources. You should not rely entirely on the opinion of others, even experts. Analysts’ recommendations can be used to confirm or “adjust” your own forecast, but nothing more.

It is impossible to learn systematic trading by regularly following the forecasts of various sources. By testing other people’s ideas on your own money, there is a high risk of capital loss. If you are not ready to make informed decisions about trades, you are not sufficiently prepared for independent trading.

4. Unwillingness to record losses

When making a transaction you expect the price to rise or fall. If the price changes unfavorably, it is necessary to fix the loss in time, otherwise the losses increase and become uncontrollable. As a result, the growing minus may simply “get” you.

Let’s assume that the price has reached a value at which you should lock in a loss. It may seem to you that the market situation will soon change and the price will turn in your direction. But it is better to limit losses in time and not “tolerate” the growing minus. Holding a losing position does not guarantee that the price will return to its initial value and prevents you from making new promising deals. At the right moment you will be able to open a position again (re-enter a deal), if the price forecast remains the same.

A reliable solution to the problem of timely and quick exit from a losing trade is to place a stop order at the same time as opening a position.

Stop orders. How to set them and whether they are suitable for all investors

5. More risk, more money

The higher the risk, the higher the earning potential. But the flip side of the coin is that as the risk increases, the possible losses also increase. It is not for nothing that experienced traders usually allocate no more than 1-5% of their total capital to a single position.

Maximum risk can be justified only in one case – when “accelerating” the deposit. Due to the full use of “leverage”, a professional trader increases the risk to the limit and maintains it at the maximum level to increase a small deposit to an acceptable size. At the same time, during the period of deposit “acceleration” even a small unfavorable price change entails serious losses, up to the loss of all capital. Therefore, the strategy can be used only by experienced speculators, who were able to show a good financial result with a low level of risk for a long time (from a year).

6. Fighting the trend

Suppose an uptrend or downtrend dominates in a stock. By opening a position in the opposite direction from the trend, the investor assumes unreasonable risks. Attempts to “catch” the trend reversal simply exclude profit in the long term, because in most cases such transactions will be unprofitable.

Do not try to “short” securities in a rising market. If you feel that the decline is about to end, wait for reliable technical signals for a trend reversal. Even if a company is attractive for fundamental reasons, a persistent falling trend may continue for a long time.

It is necessary to remember a key point: a strong fall of an instrument does not guarantee that the price will not go even lower. Instead of trying to participate in the formation of the “bottom” of the market, buy securities after the price has confidently turned around. With experience, you will learn to identify the moment of trend change earlier.

Below is an example with an uptrend. After the price stops or corrects downward, it may seem that the trend is about to reverse. Nevertheless, the quotes continue to grow almost continuously, changing the trend only after breaking a strong price level.

7. Position averaging

Position averaging is a decrease in the average price of a position by buying shares at a lower price. That is, if after buying securities their price began to decline, the purchase of shares reduces the average price of the entire position. The principle works similarly for a short position (selling an asset), only the securities are sold at a higher price.

Never use this method, especially if you are not an experienced trader. Unsuccessful investments should be sold immediately – in this way you fix the loss, not allowing it to grow.

The only case in which averaging can be justified is in long-term investments. By buying shares of a stable company and holding them for more than a year, an investor can buy back shares at a falling price, which increases the potential profit. But because the potential loss also increases (if the price falls further), the strategy has the flip side of the coin.

In order to avoid averaging, a number of investors use techanalysis. It allows taking into account the current market sentiment and entering a deal at a more favorable price. In this case, a price drop below a certain level tells the trader that he misinterpreted the attractiveness of securities. In this case, it is easier to fix the loss without aggravating the situation by averaging.

Averaging in a falling market – a gross mistake or a successful strategy?

8. Unrealized gain or loss

There is a misconception that a loss (or profit) is not “real” if the position has not yet been closed. However, your portfolio is worth exactly what you can sell it for in the market right now. An unrecorded loss is the same as a loss.

Many beginners and even experienced traders are reluctant to close a losing position because they do not want to accept the fact that the price went against their forecast. Various emotions, stubbornness, pride arise here, which prevent them from calmly fixing losses. As a result, the loss continues to grow further without any guarantee that the price will return to the previous level. This can lead to excessive losses, which are hard to make up for later. It is important to realize that if a stock has fallen by 50%, it needs to grow by 100% to reach its original value.

9. “Favorite” shares

For various reasons, some investors allocate to themselves stocks that they find particularly attractive. It is not necessary to do this, because in case of collapse of quotations it will be difficult to get rid of them in time. In general, a growing stock can become unprofitable at any moment. While you are focused on personal “favorites”, you miss the opportunity to make money on rapidly growing securities.

It is important to realize that the stock of an “excellent” company may well fail to grow over the short term. Often promising stocks show mediocre rate dynamics, revealing value only on the long-term horizon. This is because fundamental analysis does not take into account current market conditions, including investors’ interest in buying certain securities.

10. Utilization of borrowed funds

Under no circumstances should you fund your brokerage account with loan money. A loan obliges you to repay the money regularly with interest, which puts psychological pressure. You are haunted by the idea of the need to earn money from the stock exchange on a regular basis. But this is impossible, because the market does not “give away” money at your personal will, but provides an opportunity to earn money in favorable periods of time.

Free capital should be used in trading on the stock exchange. And if you adhere to high risks (for example, when trading futures with leverage), you should be psychologically ready to lose most of these funds due to unforeseen circumstances. Never trade with the last or borrowed money.

If you follow these 10 rules, the chances of success are greatly increased. If you love trading, devote enough time to systematic trading and analyzing mistakes, sooner or later you will find your own way to profit. The main thing is not to consider the market only as a source of income, otherwise failures will not be perceived as experience and will only lead to disappointment.