We have taken the time to spell out some of the common mistakes which many investors and traders suffer. These common mistakes tie in closely with psychology and they way you approach trading and investing.
Act early and combat these common mistakes, you will be thankful you did.
1. Fearing to take a Loss
Taking a loss is as much a part of trading as taking a profit. There is a large difference in being afraid to take a loss and a trader who is very prudent in their approach to risk management. All traders need to be aware that losing trades and winning trades are a part of investing, it's just the size of each win or loss which is the crucial factor in your overall long term success in the market.
Two common thoughts are adopted by traders/investors when they become afraid to take a loss:
a) Traders become more concerned with the fact that they have spent their valuable time researching and planning the trade and this effort represents a cost to the trader. This cost warrants the fact that the trade should never be exited at a loss. The trader then gives the trade more room to move which eventually results in a larger loss. This larger loss then compounds the fear of making another loss and the cycle continues.
b) Some traders place more importance on losses than they do on winning trades. In the mind of a trader, losses have a greater significance when in fact both are identical and should be thought of as such. So long as the number of winning trades is larger more than the losing trades or the amount of winning profit averages are higher than the average loss on losing trades you will survive to trade another day.
- Overcoming this mistake
Every trade needs to be assessed before committing to it, as a trader you should ask yourself what you hope to gain from the trade and what do you stand to lose should the trade not go in your favor. Remember that identifying the amount of risk you are willing to take on the trade will assist to make this checklist easier. Before committing your hard earned capital to any trade you should understand all the trade parameters: Exit strategy, maximum risk, expectations etc.
Never believe that you have to commit all your capital in the market all the time. As an investor your aim should be to make your capital work for you all the time, this is a correct statement however sometimes you need to realise the right and wrong time to be exposed to the market.
A trader has different objectives, a trader will look to make more profit than loss on all trades. A trader will adhere to the rule of cutting losses and letting profits run. So long as the trader keeps losses small and profits as large as possible the trader will enjoy long term success in the market.
The two terms investor and trader should never be confused. Before any trade, you should identify which methodology is to be employed.
- Overcoming this mistake
You should endeavor to identify which category each trade will fall into. Ask yourself the question, "Is this trade an investment?". Be clear which category each trade falls into.
3. Not being conscious of Risk
Only a fool would try to convince you that trading/investing has no risk. You need to remember and be conscious at all times,the amount of risk you take with each trade and of your overall risk exposure. Try to define your purpose in the market and never forget your other responsibilities.Always be mindful that you aim to stay in the game as long as you can, never try to take on more risk than you can handle. Obviously there will be a trade off between the amount of risk you take on each trade and the expected reward. You should try to define a balance which will never put at risk your health, family and well being. These being the most important aspects of life.
- Overcoming this mistake
Never loose sight of your greater purpose in life. Understand that risking too much today may very well prevent you from trading/investing again in the future.
4. Not keeping organised
Many traders and investors start their trading career without any consideration to organisation. Down the track they find it difficult, if not impossible to identify weakness in their trading plan, new opportunities and to be able to constantly evaluate their performance in the market.
These types of traders will often find it hard to survive in the market and if they do, they continue with only mediocre results.
- Overcoming this mistake
Your in the spot to overcome this common mistake! Start by utilising the power of a sophisticated portfolio management tool which provides you with an insight into your trading performance allowing you to tune your trading plan to make it stronger and stronger. By adopting portfolio management at an early stage of your investment career you will make it a habit to constantly assess your performance, anything less will seem very amateur.
Your results will speak for themselves.
Good traders and investors constantly review their goals. Always ask yourself the questions:
Why do I trade?
Why do I want to take this trade?
What are my financial goals and am I on the way to achieving those goals?
- Overcoming this mistake
Constantly keep track of your performance and review these results with your stated objectives. If you are off track it is better to be pro-active and act early to ensure you always reach your financial objectives.
6. Thinking the next trade will be the "Big One"
Some traders become fixated with the next trade. Sometimes as a way to dismiss the bad luck experienced on a previous trade, they become convinced that the next big one is always a single trade away. This is usually never the case.
Eventually you will trade with favorable results however you should never go into each trade thinking that the trade will be the next big win. There is no place for gambling psychology in the trading/investing arena.
The true path to wealth and prosperity is always to take small steps, some of those steps may be larger then others however it's of no value to think that each step will be a jump, eventually you will fall.
- Overcoming this mistake
Take each trade on its own merits, complete your research and understand the risk you are taking on the trade. Realise that the trade could have a downside and be prepared to exit the trade should the trade not go in your favor.
As is nearly always the case, you should assess each trade along side your financial goals.
It has been argued that humans can behave in quite irrational ways, for example:
1. Many investors and traders hold onto positions long after they should have disposed of them as they view paper losses differently from realised losses.
2. Many investors and traders attribute success to skill and losses to bad luck and often rate themselves higher than other investors regardless of whether they are actually better at investing and trading.
3. Many investors and traders too often believe that they know more than they actually do know.
- Overcoming this mistake
Understanding that these issues plague many investors and traders will already place you in a superior position to the large population of traders. You should aim to never suffer any of the three beliefs listed above. Bearing in mind we are all human beings, when you look closely at those investors who are highly successful you will note that none of them suffer from the issues outlined above.
