Every day New Traders enter the stock market with the hope of making profits. Many of them suffer losses and get disheartened and never trade again. This happens because of some common mistakes that a lot of beginners make during their early trading days. This Blog article will help you avoid these mistakes and eventually become a more profitable Trader who can stay involved in the market for a long time.
- When you start trading always have a strategy and be disciplined in your approach.
- Only initiate a trade when the Risk/Reward ratio is 1 to 2 or Better
- Research Brokers to reduce your transaction fees.
1. Lack of Preparation
A New Trader might enter into a trade based on a piece of information recently released on a stock. Beginners don’t want to miss out on the ongoing rally and end up buying the stock at a higher price and/or selling it at a lower price as it falls; this is called “Chasing the Market”. They don’t have a strategy to tackle this issue. You can prepare yourself by being aware of potential Market Moving news, Upcoming Economic Data releases, and Corporate Earnings Reports which will give you an advantage. You will be able to prepare a strategy by being updated and you can work on other aspects of a Trade Set- Up such as risk/reward.
2. No Trading Plan/Strategy
Secondly, you should have a trading plan that suits your risk appetite and return objective. This blueprint is critical for gaining success in trading. You should considered following things –
- When & how to enter and exit a trade and under what conditions.
- How to manage the risk in the trade.
- What should be the size (number of shares) of the trade.
You need to follow a routine which will help you in being ready when an opportunity arises. The routine will be different for every trader. You should know what your strengths and weaknesses are when preparing a Trading Plan.
3. No Understanding of Risk/Reward Ratio
Risk/Reward ratio is very important to consider before starting to trade. Beginners often initiate trades in which the Risk/Reward Ratio is only 1 to 1 or worse. The risk should not be higher than the reward. You will tend to overtrade with a 1 to 1 ratio and if the markets drop, you may lose a large amount of money. A general rule of thumb is to only initiate a trade in which your strategy recognizes a potential Risk/Reward Ratio of 1 to 2 or better. The reward should be at least double the risk taken for a trade. The Zivolve App helps you with the Risk/Reward Ratio by letting you know the risk involved for any trade.
4. Being Impatient & Not Using a Stop/Loss Order
After entering into a trade many beginners will keep monitoring the stock continuously for a positive movement. If there is a slight fall in the price, they will panic and get out of it prematurely by booking losses. Hence, you need to be patient in these situations and stick to your strategy. Beginning Traders often have a difficult time in not becoming overly emotional. Fear and Greed can cloud their judgement.
Therefore, having a StopLoss order in place will help you relax, take the emotions out and limit your loss by predefining an amount of money which you are willing to lose. A Stop/Loss Order is normally based on the percentage of risk (1% or 2%) a Trader is willing to accept for a trade. while setting a Stop/Loss order, support and Resistance levels in a stock should be taken into account. It needs to be Above or Below the following levels:
- A previous price High or Low
- A Fibonacci Retracement Level
- A Moving Average
This makes it easier for a new Trader to place a Stop/Loss Order, The Zivolve App helps you to select an appropriate level for a Stop/Loss Order.
5. Paying Too Much in Fees
You should research various brokers and check for:
- Fee Schedule
- Average Bid/Ask Spread
- Interest rate charged on leveraged trades
Brokers who sell their order flow will tend to offer wider Bid/Ask spreads which will cost you money in the long run. Brokers charge exchange fees per transactions, which are paid by all traders. You can save on other Broker charges if you do your homework.
6. Over Trading
Many New Traders are impatient, not disciplined, and take mediocre to poor Trade Set-Ups; Risk/Reward Ratios of 1 to 1 or less.. This Over Trading will only add to your Transaction costs. You also need to consider the timeframe that suits you best. Trading in a 3 to 5 minute Chart time frame can be mentally exhausting, cause frustration and financial losses. Instead, using higher time frames such as 30 Minute, 60 Minute or 120 Minute Charts can be easier to follow and help in finding better trade Set-Ups and reduce your transaction costs.
Eventually, avoiding these mistakes can help you achieve your goals. Overall, you need to do the hard work, learn from your mistakes and improve . The Zivolve App is there to help you become a better Trader.