…We’re [all] driven by our emotions, especially fear and greed…[so] if you want any chance of success, you need to know…what to do and you also MUST know what to steer clear of. That’s what this article is about. I’m sharing 13 mistakes that traders need to avoid like the plague. Learn them and stay away from them!
…Sometimes traders get so caught up in their trading that they forget everything else. Don’t be one of them! These are common mistakes that stock traders don’t need to make.
#1. Buying Stocks Without a Plan
…When you enter a trade, you should be able to answer these questions:
- What am I seeing on the chart that is making me go long or short?
- What are my price targets?
- How much of my money am I willing to risk?
- At what point does this trade move against me and make it so that the trade cannot work in my favor?
If you can answer the above questions, then you can set your plan with entry and exit points. If you can’t answer those questions, don’t make the trade!
#2. Shorting Hype Stocks Too Early and Getting Demolished on Your Shorts
What goes up must come down. That’s particularly true of stocks being pumped and dumped by scammy promoters. I’ve enjoyed riding on their coattails.
- When I spot a stock in the very early stages of a pump, I’m glad to buy and ride along as it goes up – you need to find where the “top” is on a stock. This starts with finding resistance levels and finding when buyers are leaving and sellers are starting to take over the stock.
- When…[a stock is being dumped I sometimes] profit by selling short. You have to watch your timing, though. Don’t sell short too soon! Remember, hype can keep pushing a stock’s price up much longer than you can avoid bankruptcy.
#3. Not Cutting Losses Quickly
This is the biggie. This mistake probably counts for most of the money traders lose…because it’s such a common, typical human failing. We don’t want to admit we’re wrong but, as trader, you can’t afford that. When you make a mistake, get out … like, five minutes ago.
You will never be 100% correct on your trades. I’m not. After trading and studying the markets for twenty years I’m right about 74% of the time. That’s good, but it means I’m wrong 26% of the time. I haven’t blown up my account yet because I admit I’m wrong — and I get out, fast. A trade isn’t a fight for something you believe in!
You need to predetermine your risk when you enter a trade. (Remember the plan I wrote about in #1?)
- What’s the risk to reward ratio?
- How much are willing to risk?
Once you know what you’re willing to risk, enter the trade and set your stop loss. I’ll be the first to admit that it doesn’t feel natural to enter a trade that you think will be profitable and immediately set a stop loss, but it can protect you from incurring huge losses to your account.
#4. Buying Stocks With No Volume
As a stock trader, you’re given information about the stock price and the volume but most beginner stock traders only look at the price and completely ignore volume. This is a serious mistake.
- Market makers can move the stock in one direction on very little volume. You may see a stock up 10%, but if you look at the volume traded you see it’s only 5,000 shares. Avoid these traps by remembering that volume validates price.
- If a stock is moving strongly in one direction or the other, it needs to be accompanied by strong volume. Think about it this way: It takes a lot of effort to move a stock. That effort is the volume. Stocks can’t move on zero volume, and they shouldn’t be moving strongly on low volume. If stocks are moving on low volume, it’s hype. Avoid hype.
Always look at the price action and confirm it with volume – and never forget that volume validates price.
#5. Not Keeping a Trading Journal
When you think of trading, “journaling” isn’t something that usually comes to mind. You note when you enter a trade and exit with a profit, then move on to the next trade. Right? Nope. You have to keep a journal of ALL your trades — the good, the bad, and the ugly.
- Take screenshots of the chart and the setup that you got you into each and every trade.
- Write down your thoughts on why you liked the chart and entered the trade.
- Then write down when you exited the trade.
- Study your entries, exits, and timing.
Learn from your success and failures. It’s one of the best ways to improve as a trader.
#6. Trading Too Large Position Sizes
When you’re trading, always keep position size in mind. Don’t risk too much of your total trading account on any one trade! When you’re just starting out you may have only a small stake to begin with. Even so, never risk your entire account on one trade unless you’re prepared to totally start over again.
You may love a chart and think the price will increase, but what you think doesn’t matter to the market.
- Use good judgment and proper risk management practices…
- Test your trading strategies and rules with small position sizes.
- Make 50–100 trades to gauge your win rate. Once you know that, you can gradually increase your position size and refine your strategy along the way.
#7. Trusting Stock Promoters
…The job of stock promoters is to pump up stocks to drain all the money out of your account. Don’t join their email lists. Stay away.
After the promoter has convinced every sucker to buy the stock, they will sell their shares. Their profits come out of your trading account! Falling for their bullshit is one of the stupidest mistakes traders make.
#8. Trading Difficult and Unclear Patterns
Look at a typical stock chart. It’s not really mysterious. It’s very exact. It shows precisely the stock’s price history. Those points trace out clear, straight lines…[That being said,] there’s a temptation to see patterns in the charts that aren’t really there (it’s not really a cup and handle, but it looks sort of like a cup and handle, so you run with it) so stick with the patterns and indicators that are clear and unmistakable.
#9. Ignoring Indicators
The technical indicators are telling you a story about the stock, and you can’t afford not to read what it’s saying. Buy breakouts and sell breakdowns.
- When the indicators tell you a trend is close to its top, take your profits. Get out of the trade.
- When the indicators tell you a stock is not ready to trade yet, stay away.
Bottom line: You need to stick to your trading plan.
#10. Letting Emotions Take Control of You
The financial markets are a perpetual battle between the bulls and the bears. When a stock’s bulls outnumber the bears, the price goes up. When the bears are stronger than the bulls, the price goes down, and the same battle plays out in your mind, your heart, and your gut. It’s the constant push-pull of fear and greed, and that’s what leads you to make psychological trading mistakes: You let your emotions overrule your mind.
You can’t turn yourself into a cyborg trader, and that’s good. You have to harness those emotions so they serve you.
- Greed is a good thing when it motivates you to work hard to learn to trade because you want to support your family, achieve financial independence, and live the laptop lifestyle.
- Fear is a good thing when it prevents you from putting on stupid sure-loser trades, when it keeps you from overtrading your account, and when it tells you to close out a losing trade before you lose more money.
Stay in control. Use your head so you always know when it’s useful to feel greedy and when it’s dangerous to ignore fear.
#11. Entering a Trade Based on Your Gut
This is similar to Mistake #10. When a gut feeling is your only reason for entering a trade, that’s one of the trading mistakes too many people make while trading stocks. It’s greed and hope controlling you instead of facts — instead of the objective reality of the chart and the market. It’s a form of fantasy. Fantasy is for books and movies, not trading penny stocks. [Instead,]:
- Learn the main patterns and how to recognize them in a stock chart.
- Learn to follow trend lines.
- Buy breakouts and sell breakdowns.
- Learn from your mistakes by keeping a trading journal.
- Establish the discipline of following your trading plan.
- When you have a good set-up, force yourself to look at it closely and analyze it before you pull the trigger. Is it real or is it hope? Is it real or is it hype?
- Once you’re sure it meets the objective criteria for a good trade, then go for it.
#12. Neglecting Stop Orders
A solid way to prevent excessive day trading losses and potentially lock in some profit when you have a winner is to make sure you set stops on every single trade. If you stay glued to your computer you might think you don’t need them but, sooner or later, you’ll get distracted by another trade, the news, lunch, or a sudden need to rush to the bathroom…
When a stock loses support and everybody wants to get out in a rush, it can fall a lot faster than you can get your sell order in. That can wipe all your profits and much more.
- Set your stop-loss order as soon as your trade is filled and, like I said before, you need to
- predetermine this risk before you even enter the trade.
#13. Lack of Preparation
…If you want to succeed at trading,
- you must become the strictest, hardest-ass boss you’ll ever have in your life: you and
- you also need to be your boss’s hardest-working student and employee.
It takes discipline. Some people can’t handle it…They’re not ready to sacrifice time and effort now to potentially grow their money.