Some people make better decisions than others. However, trying to attribute this to having a better intuition is just oversimplifying things. Intuition usually comes from experience. You subconsciously recognize a pattern, which evokes a positive or negative feeling about it. However, what do you do if you don’t have much experience to begin with? You make mistakes.
Fortunately, learning from your own mistakes is not the only way to learn. Instead, you can learn from the mistakes of others. Here are some of the most common mistakes in trading and how to profit by learning to avoid them.
Table of Contents
1. Don’t get emotional
Getting too emotional while trading is a grave mistake. You see, your beliefs don’t affect the trading market. Positivity bias is a great coping mechanism but doesn’t change reality. No, an upward trend doesn’t have to happen after a downward one. It often does, but there’s no rule about it.
Another psychological phenomenon that causes you to be too emotional in trading is FOMO. What is FOMO in trading? You see a trend and get afraid that you’ll be left behind.
For instance, many people sold their Bitcoin in 2017 when it reached $8,000. The figure seemed so outlandish that they believed they’d lose the opportunity if they didn’t act immediately.
There’s also an aspect of social pressure here. Imagine everyone else profiting from this while you’re the only one left behind.
However, you can also cash in on FOMO. By understanding that it’s a common phenomenon, you can assume that other people will also feel this pressure. So, you kind of know how the market might behave.
2. Have a strategy
The easiest way to make your trading more systemic is to start using a strategy. With the right strategy, you’ll have a more data-based approach to this situation. You’ll better understand the risk-to-reward ratio and better understand what’s happening.
The next thing you need to understand is that there’s no one perfect strategy. Each strategy is different; you must pick one that fits your trading style.
It’s also important to mention that different strategies have different complexity levels. So, as a beginner, you want to pick a simple strategy. If anything, this will improve your learning experience as a trader.
Another thing that it helps you with is avoiding trader’s remorse. Imagine betting on the same number 1,000 times, only to change it once and have that number win. Not to compare gambling and trading (although some traders have this approach), but such a thing happens more often than you think.
The effects of this would be devastating for your mindset and make your decision-making even more flawed in the future. Having a strategy in trading is useful even outside of the stock market. For instance, games like Rocket League have their own in-game trading system. You would be surprised at how well some of these strategies translate.
3. Understand leverage
Leverage allows you to trade with borrowed funds. This is a quick way to increase your profits, but it may also backfire. It will make your gains higher and your losses worse.
This is why you should only use the amount of leverage you’re comfortable with. An experienced trader may use 100:1 leverage without losing much sleep over it. For a new trader, on the other hand, this is the easiest way to ruin your trading career in a single trade.
Leverage is especially useful in FOREX trading. This is because a small price change in a currency pair requires massive investment to create a meaningful profit. With leverage, you can get the funds to do this. It’s also worth remembering that stock trading margins are much smaller than those in the FOREX market.
To truly understand leverage, you must familiarize yourself with the terminology. You need to understand concepts like:
- Buying power
- Coverage ratio
- Risk ratio
- Margin call
- Closing position
This is the only way to make a fact-based decision.
4. Do your research
You can’t just take other people’s advice at face value. If you’re serious about trading, you need to do your research. Combining the two is probably best, but how can you verify the advice you’ve received if you can’t research?
One of the best ways to proceed is to narrow your focus to a limited number of aspects or factors. Ideally, you would specialize in one type of asset trading. This will make research easier because your understanding of the concept will be more in-depth.
You need to look for reliable stock research materials. For instance, it’s better to get your information straight from Form 10-K or Form 10-Q than from a third-party source. Trust but always verify, and to do so, you need to be able to track it to the source.
5. Cut losses
Another thing you need to understand is the importance of cutting losses. Knowing when to pull out is the only thing that will keep you in the game for the long run.
This is what stop orders are great for. Every time a stop order falls below 5-8%, you can set an order to execute a sale. The sooner you accept the loss, the more money you’ll save in the long run. So, unless you’re convinced that the stock will bounce back (in which case you should buy more while the price is low), you need to be proactive with this.
Setting a stop order when you lose 1-2% of your total trading budget is the best way to preserve your financial health in the long run.
These orders can automate the process and make it harder for you to act emotionally (something we warned you about early on). You need to understand that ego or pride has no place here. You need to stick to data and make decisions based on data analysis. That’s it.
Wrap up
In the end, don’t let your emotions guide you. This is easier said than done, so you must install safeguards like stop orders. Also, the better you are at research, the easier it will become to approach trading rationally.Finally, there’s no pride or ego in this game. You’re in trading for the money. You’re not trying to prove anything or impress anyone. Cutting your losses doesn’t make you a loser. It makes you smart.
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