The stock market seldom moves in a linear fashion. The Indian share market, lately, has seen periods of volatility which have left traders in jitters over the performance of their investments. With the share market witnessing negative trading activities, many traders have proceeded to make investment decisions in a hurry and ended up incurring substantial losses.
Losses in the stock market are not a rarity, given the volatile nature of some investment instruments. However, incurring consecutive losses not only lead to monetary erosion but also affect the trader or investor’s psyche, causing them to make trading mistakes.
If you are an investor or a trader looking to start investing afresh, here are the top 10 mistakes that you should stay wary of and avoid at all costs. Read On!
Most seasoned traders get engaged in trading only with a properly chalked out plan. They have a fair idea about their entry and exit points, the quantum to invest in trade, as well as the maximum risk they are willing to undertake regarding stock trading.
Traders who are just beginning in the market may not have a comprehensive plan in place before they venture into trading. Even those with a plan tend to stray away from it, leading them to let go of their stocks as soon as the trade starts moving against them.
On the other hand, few investors are influenced by their emotions and refrain from relinquishing the stocks even if they are incurring losses for a long period. These are two of the gravest mistakes in stock trading that traders should be mindful of to avoid.
Most traders make trading mistakes of selecting asset classes, managers or strategies based on their current market performance. However, if an asset is performing well in the market for the last 3-4 years, it does not guarantee that it will uphold its performance in the future.
Therefore, it is crucial for traders to put in ample research on the asset they want to invest in, its scope of performance, the style of trading investors want to follow, etc.
One of the crucial investing tips for the stock market is rebalancing assets. Rebalancing refers to the process of maintaining the weight of an investment portfolio. It involves selling or buying assets in a portfolio in a periodic manner to maintain a desired level of risk.
For instance, if a trader began with a portfolio consisting of 50% bonds and 50% stocks, the superior performance of bonds during the holding period increased the bond weight of the trading portfolio to 60%. However, to rebalance from this scenario, traders can choose to sell some bonds and revert the trading portfolio to its original 50-50 allocation.
Traders often forget to rebalance their assets which leads to asset classes becoming underweight during market lows and overweight at market peaks, leading to poor performance. Thus, traders should avoid the mistake of not rebalancing their portfolio.
Traders should always be mindful of their risk tolerance. One of the first investing tips for stock market that traders should know about is investing in assets that cater to their risk appetite.
For instance, some investors cannot handle the fluctuations of the stock market and need stable interest income. For such investors, government securities, treasury bonds, bills, etc. make for the perfect trading instrument.
On the other hand, few traders look to maximize returns from their investments and are ready to shoulder any amount of risk. These individuals can afford to incur losses if the stock market goes down.
Thus, one of the biggest trading mistakes individuals can make is ignoring their risk tolerance and trading more than they can lose.
Stop-loss order refers to orders placed with stockbrokers to purchase or sell securities when they reach a certain price threshold. These orders are designed in a way to keep a trader’s loss on securities limited to an extent. Stop-loss orders are executed once the pre-set perimeters regarding stock trading are met.
Usually, traders without a proper trading plan do not implement a stop-loss order. It is one of the common mistakes in stock trading that can lead to traders incurring sizable losses. However, implementing stop-loss on long positions in stock trading can cause the stocks to be capped below the positions that have been specified, leading traders to incur losses.
But overall, implementing this order has more advantages over risks in the long run.
Position size is one of the factors that should be kept in mind while trading. Traders should avoid trading mistakes of risking the majority of their total trading account on any single trade.
When an individual starts with trading, he or she usually has smaller stakes. Even then it is ill-advised to risk the entire account on a single trade unless the trader is prepared to start over from scratch, in case of losses.
Experienced and successful investors can bear small losses and move on quickly from it. However, newbie traders do not have enough experience in trading and may freeze if the trade goes against them. Rather than capping their losses, they make the investing mistake of holding on to their position with the hope that their investments will work out in the long run.
Holding on to a losing trade can keep trading capital engaged for a prolonged period and can eventually result in losses of sizeable quantum.
Most new traders make the mistake of engaging in a herd mentality when it comes to trading patterns. This is one of the investing mistakes where traders can either end up paying more for stocks or initiating short positions for stocks that have already taken a dive and can take a turn around in the near future.
Most seasoned traders follow market trends to take pertinent decisions that help them to stay in a trade as long as it remains profitable.
As the proverb goes – “putting all eggs in one basket” is not a good idea when it comes to trading. Having a diverse portfolio is crucial to ensure that traders can fall back on a portion of their stocks if the others do not perform as expected. Following is a table to illustrate how traders can diversify their stocks and allocate their assets efficiently –
|Asset allocation (in %)||Description|
|85% in stocks, Mutual Funds and other equities||These are the “riskier” investments that can bear maximum returns for investors.|
|13% in bonds||These are safer than equity investment and bear moderate returns over a fixed period.|
|2% in cash||This is liquid money in one’s savings account|
Investors should diversify their trading portfolio according to their risk tolerance and returns expectations.
Whether seasoned or beginners, traders should put in ample homework on the stock market before pursuing trading. If any investment interests them, traders should research them before initiating the trade. This is how they can identify good investment options and avoid mistakes in trading in the future.
So this was a list of mistakes that traders should be mindful of and try to avoid at all costs. Remember, as a trader you can make better decisions regarding your investments as long as you trade rationally and always have a plan in place.
Disclaimer: The views expressed in this post are that of the author and not those of Groww