Stock Trading Mistakes and How to Avoid Them

Website design By BotEap.comIf you know how to analyze a stock to determine good fundamentals, and if you know how to read a chart to choose the right time to invest, that’s all you need to trade successfully, right? MISTAKEN!

Website design By BotEap.comI hear you say, what do you mean wrong? What else is there?

Website design By BotEap.comWell, there is a thing called managing the trade. This aspect could be the most important part of the trade. Let me say it again: manage the trade, avoiding mistakes in stock trading. No matter how healthy a stock’s fundamentals are, and no matter how low-priced you might think a stock is, there is one thing experienced traders know. Actions rarely move logically. Sure, if you take a hard look at one and think it’s a great buy, you might ultimately be correct about your direction. I say ultimately because no one knows which way the action will go before it does what you expect it to do. And it’s on the way to your goal that a trade can wreck you both financially and emotionally.

Website design By BotEap.comOh, but you say, what if it takes me a long time to reach my goal? I’m strong and I can take it!

Website design By BotEap.comWell, well done, my brave merchant friend! But not so fast. Let’s take a look at what can go wrong in a trade and why it’s important to manage it diligently. If stocks always responded to fundamentals, they would always be fairly priced. The fact is that there are other factors that influence the direction of a stock and cause it to move illogically compared to its fundamentals. Factors include, on the one hand, the health of the industry in which a stock is located. You can have a stock that has great fundamentals and is growing substantially, but if for some reason the industry as a whole is in disgrace, guess what? That’s right, your stocks can easily get caught in a downtrend.

Website design By BotEap.comAnother mistake to avoid in stock trading is not changing the direction of the market in general. You may have invested in the best stocks, but if the overall market is crashing, it doesn’t matter how strong your stock is. Did you know that when the market is in a strong downtrend, about 85% of all stocks go down with the market? Conversely, when the market is in a strong uptrend, about 75% of all stocks go up. But what about a roller coaster market where it goes way down, then goes way up, then goes back down, and so on? Well, your stock will go up and down with the market, but the problem is that extreme roller coaster markets are often tied to shaky, even negative, times. So even if there are big bullish days, stocks generally don’t seem to go up as much as they went down.

Website design By BotEap.comFinally, actions are subject to news. And it could be about your stock specifically, about the industry your stock is in, or about the market in general. All of these things can affect your trading. If it’s good news, your stock will go up, but if it’s bad, you have it, your stock will go down, and if it’s bad news about your specific stock, it could go down substantially, and fast. Hey, if the news is bad enough, technically a stock can go to ZERO!

Website design By BotEap.comLet me give you an example. He has spent a lot of time studying XYZ stocks. You see, it has great fundamentals, it has an increasing growth pattern with great growth expectations for the future, and it’s in a great industry. Based on his analysis, he thinks XYZ should be priced around $65. But because the market has been in a general downtrend, XYZ got caught up in the trend and is now trading at $55. The market seems to be stabilizing now and the economic news is improving. Therefore, you have determined that this is a good time to buy XYZ. So you buy 500 shares at $55 for a total of $27,500. Next week, news breaks that XYZ is being investigated for possible accounting fraud and may have overstated its earnings. If that kind of news came out, what do you think would happen to the price? BOOM! The price would start to fall. Now this scenario is a bit extreme, but it does happen. But even if the news is less extreme, it can still hurt your trade.

Website design By BotEap.comOf course, it is possible that after the investigation, it will be found that there was no problem after all and XYZ will go up in price again. But that can take a long time. Do you want to live all the heartbreaking emotion in such a case? sure not. Under these circumstances, most traders get into emotional trading, making panic decisions and that is the worst place for a trader to be. And there’s also the possibility that the investigation uncovers a real problem and it could take XYZ years to recover. So what should you do to avoid getting caught up in this type of scenario?

Website design By BotEap.comManage your operations!

Website design By BotEap.comYou say, well, how do I do that?

Website design By BotEap.comThat’s what I’m about to tell you. You manage an operation knowing, even before making a purchase, what your exit points are. And when I say exit points, I mean knowing how much profit you want to make and what is the most you are willing to lose if the trade goes against you. Then watch the operation closely and exit when either point is reached. Don’t start guessing when one of your points is hit. That becomes trading in emotions and that is almost always not good. Stick to your plan. Even better. Once you enter a trade, immediately place a GTC order to sell the stock when you reach your profit point, and at the same time place a stop order at your loss tolerance level.

Website design By BotEap.comFor example, you buy shares of XYZ for $55. Your analysis says the stock is worth $65. Giving the game some room, you make your target $62 and put it in the GTC order. That’s a profit of $8 (14%) – and that’s a nice profit. Don’t be greedy! So you decide that the most you are willing to lose is $5. so you put a GTC stop at $50. So you can win more than you would lose and that’s a good ratio. The other thing you can do with the stop is place a trailing stop. This has its pros and cons that we will talk about in another article. But a professional is this. If you place a trailing stop of $5 and the stock goes up, the stop will follow it at $5 and go up as well. So your point of loss gets smaller and smaller as the stock goes up. Hopefully you hit your profit point before they stop you, but you get the idea.

Website design By BotEap.comStops can also be set with a percentage amount. You just have to think about it and decide if you like a dollar amount strategy or a percentage strategy. Either way it’s good. However, the main thing in managing your trades is to map out your strategies and keep them consistent from trade to trade. And by the way, these management ideas can be applied to trading options as well.

Website design By BotEap.comThere are other things we could discuss about managing multiple operations, but we’ll save that for another time. This is enough for today.