Common Investor and Trader Blunders

When it comes to trading or investing, making mistakes is part of the learning process. Investors usually participate in long-term holdings and will trade stocks, exchange-traded funds and other securities. Traders usually buy and sell futures and options, hold these positions for a shorter period of time and participate in more transactions.

Although traders and investors use two different types of trading, they often make the same type of mistakes. Some mistakes hurt investors more, while others hurt traders more. Both people should remember these common mistakes and try to avoid them.

 

No trading plan

Experienced traders will trade according to a clear plan. They know their exact entry and exit points, the amount of capital invested in the transaction, and the maximum loss they are willing to bear.

Novice traders may not have a proper trading plan before starting to trade. Even if they have a plan, they may be more likely to deviate from the established plan than experienced traders. Novice traders may change direction completely. For example, short selling after the initial purchase of a security due to a fall in the stock price-the result is one size fits all.

 

Pursue performance

Many investors or traders choose asset classes, strategies, managers and funds based on current strong performance. Compared to any other single factor, the feeling of “I missed a good return” can lead to worse investment decisions.

If a particular asset class, strategy or fund performs very well in three or four years, we must know one thing: we should invest three or four years ago. However, now, the specific cycle that led to this outstanding performance may be coming to an end. Smart money is moving out, stupid money is pouring in.

 

Unbalanced

Rebalancing is the process of restoring your investment portfolio to the target asset allocation outlined in the investment plan. Rebalancing is difficult because it may force you to sell well-performing asset classes and buy more of the worst-performing asset classes. This contrarian operation is very difficult for many novice investors.

However, allowing investment portfolios that vary with market returns guarantees that asset classes will be overweighted during market peaks and undervalued during market lows—a formula for underperformance. Rebalance religiously and get long-term rewards.

 

Ignore risk aversion

Don’t ignore your risk tolerance or ability to take risks. Some investors cannot tolerate the volatility and ups and downs associated with the stock market or more speculative trading. Other investors may need safe, regular interest income. These low-risk investors are best invested in blue-chip stocks of mature companies and should stay away from volatile growth and startup stocks.

Remember, any return on investment is accompanied by risk. The lowest risk investments available are U.S. Treasury bonds, bills and notes. From there, various types of investments have risen in the risk ladder, and will also provide greater returns to compensate for the higher risks taken. If an investment provides a very attractive return, look at its risk profile to see how much money you might lose if something goes wrong. Never invest more than you can afford to lose.

 

Forget your time horizon

Don’t invest without a time frame. Before entering the transaction, consider whether you need to lock in investment funds. In addition, determine how long (time frame) you must save for retirement, home down payment, or your child’s college education.

If you plan to save money to buy a house, it may be more of a medium-term time frame. However, if you want to invest to fund the college education of young children, it is more like a long-term investment. If you are saving for retirement 30 years from now, the stock market trend this year or next should not be your biggest concern.

Once you understand your perspective, you can find investments that match that profile.

 

No stop loss order

An important sign that you do not have a trading plan is not to use stop orders. There are many types of stop loss orders that can limit losses caused by adverse changes in stocks or the entire market. Once the boundaries you set are met, these orders will be executed automatically.

A strict stop loss usually means that the loss is capped before the loss becomes significant. However, if the security gap suddenly drops, the stop-loss order for the long position may be executed at a level below the specified level-as happened with many investors during a flash crash. Even with this in mind, the benefits of stop-loss orders far outweigh the risk of stopping losses at unplanned prices.

The inevitable result of this common trading error is when traders cancel stop-loss orders before losing trades are triggered because they believe that the price trend will reverse.

 

Let the loss increase

A decisive feature of successful investors and traders is that if the transaction is unsuccessful, they can quickly withstand a small loss and then move on to the next trading idea. On the other hand, if trading is not good for them, unsuccessful traders may be paralyzed. They may not take quick action to limit losses, but will hold losing positions, hoping that the transaction will eventually succeed. Loss trading will occupy trading funds for a long time, and may lead to increasing losses and severe depletion of funds.

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Average downward or upward

The average long position of bearish blue chip stocks may be suitable for investors with longer investment horizons, but it may be fraught with danger for traders who trade in volatile and risky securities. Some of the biggest trading losses in history are due to traders increasing their losing positions and eventually being forced to cut their entire positions when the magnitude of the loss becomes unbearable. Traders are also shorting more frequently than conservative investors and tend to rise on average because securities are rising rather than falling. This is an equally risky move and another common mistake made by novice traders.

 

The importance of accepting losses

Investors often fail to accept the simple fact that they are human and are as easy to make mistakes as the greatest investors. Whether you are buying stocks in a hurry or one of your long-term high-income earners suddenly gets worse, the best thing you can do is to accept it. The worst thing you can do is to make your pride take precedence over your wallet and stick to losing investments. Or worse, buy more stocks because it is much cheaper now.

This is a very common mistake. The person who made the mistake made the mistake by comparing the current stock price with the stock’s 52-week high. Many people who use this indicator believe that falling stock prices represent a good buying opportunity. However, there is a reason behind the drop and the price, and it is up to you to analyze the reason for the price drop.

 

Believe in false buy signals

Deteriorating fundamentals, the resignation of the chief executive officer (CEO), or increased competition are all possible reasons for the decline in stock prices. These same reasons also provide good clues that can make people suspect that the stock may not rise soon. Due to the root cause, a company may now have a decline in value. It is important to keep a critical eye at all times, because low stock prices can be the wrong signal to buy.

Avoid buying stocks in bargaining basements. In many cases, there is a strong underlying cause for the price drop. Do your homework and analyze the prospects of stocks before investing. You want to invest in a company that will experience sustained growth in the future. The future business performance of a company has nothing to do with the price at which you buy its stock.

 

Purchased with an excessively high margin

Margin — Use money borrowed from your broker to buy securities, usually futures and options. Although margin can help you make more money, it will also exaggerate your losses. Make sure you understand how the margin works and when your broker may ask you to sell any positions you hold.

As a new trader, the worst thing you can do is to get dazzled by seemingly free money. If you use margin and your investment does not proceed according to your plan, then you will end up assuming huge debts in vain. Ask yourself if you would use a credit card to buy stocks. Of course, you won’t. Excessive use of margin is essentially the same thing, although interest rates may be lower.

In addition, the use of margin requires you to monitor your positions more closely. Exaggerated gains and losses that accompany small price fluctuations can be catastrophic. If you do not have the time or knowledge to pay close attention to your position and make a decision, you may encounter a margin call. If the value of your position drops significantly, the broker may automatically sell your shares to make up for any losses you incur.

As a new trader, please use margin carefully, if any, and only if you understand all its aspects and dangers. It can force you to sell all positions at the bottom, at which point you should enter the market to make a big shift.

 

Run with leverage

According to well-known investment clichés, leverage is a double-edged sword because it can increase the returns of profitable trades and exacerbate the losses of losing trades. Just as anyone will warn you not to run with scissors, you should also warn yourself not to rush to use leverage. Novice traders may be dazzled by the degree of leverage they have-especially in foreign exchange (FX) trading-but may soon find that excessive leverage can destroy trading capital in an instant. If a 50:1 leverage ratio (which is not uncommon in retail foreign exchange transactions) is used, only a 2% unfavorable measure can wipe out a person’s capital. Foreign exchange brokers such as IG Group must disclose the percentage of traders losing money in retail foreign exchange client accounts every quarter. For the quarter ending June 30, 2021,

 

Follow suit

Another common mistake new traders make is blindly following the trend; therefore, they may end up paying excessive prices for popular stocks, or they may open short positions in securities that have plummeted and may be about to improve. Although the adage that experienced traders follow trends is your friend, they are used to exiting trading when they are too crowded. However, new traders may stay in the transaction for a long time after the savvy funds are moved out of the transaction. Novice traders may also lack the confidence to trade against the trend when needed.

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Put all the eggs in one basket

Diversification is a way to avoid over-investing in any one investment. Having a portfolio of multiple investments can protect you if one of them loses. It also helps prevent any investment fluctuations and extreme price changes. In addition, when one asset class performs poorly, another asset class may perform better.

Many studies have proven that most managers and mutual funds perform below their benchmarks. In the long run, the performance of low-cost index funds is usually in the second quartile, or better than 65% to 75% of actively managed funds. Despite all the evidence supporting indexation, the desire to invest with active managers remains strong. John Bogle, the founder of Vanguard, said this is because: “Hope is eternal. Indexing is a bit boring. It runs counter to the American way [that]” I can do better. “

Index all or most (70% to 80%) traditional asset classes. If you cannot resist the excitement of pursuing the next outstanding performer, then allocate approximately 20% to 30% of each asset class to active managers. This may satisfy your desire to pursue excellence without destroying your investment portfolio.

 

Escape your homework

New traders often feel guilty for not doing their homework or conducting adequate research or due diligence before starting a trade. Homework is important because novice traders do not understand seasonal trends, the timing of data release, and the trading patterns that experienced traders have. For new traders, the urgency of trading often overwhelms the need for some research, but this may ultimately lead to costly lessons.

It is a mistake not to research the investment you are interested in. Research can help you understand financial instruments and understand the field you are involved in. For example, if you want to invest in stocks, research the company and its business plan. Don’t act on the premise that the market is effective. You can’t make money from a well-determined investment. Although this is not an easy task, and every other investor can access the same information as you do, a good investment can be determined by conducting research.

 

Purchase unfounded tips

Everyone may have made this mistake at some point in their investment career. You may hear your relatives or friends talk about the news that they heard that a certain stock will be acquired, make amazing returns, or will soon release a breakthrough new product. Even if these things are true, they do not necessarily mean that stocks are the “next big thing” and you should rush into your online brokerage account to place a buy order.

Other unfounded tips come from investment professionals on TV and social media, who often tout a particular stock as if it is a must-buy, but in fact it is just the flavor of the day. These stocks indicate that after you buy, they usually don’t succeed and fall directly. Remember, buying based on media prompts is usually just a speculative gamble.

This is not to say that you should hesitate about every stock alert. If a person really caught your attention, the first thing to do is to consider the source. The next step is to do your own homework so you know what you are buying and why. For example, buying technology stocks with certain proprietary technologies should be based on whether it is suitable for your investment, not just based on what the mutual fund manager said in an interview with the media.

Next time you want to buy based on popular tips, don’t do it until you know all the facts and are satisfied with the company. Ideally, get a second opinion from other investors or an impartial financial adviser.

 

Watch too much financial TV

There is almost nothing in financial news programs that can help you achieve your goals. Few newsletters can provide you with any valuable information. Even if there are, how do you identify them in advance?

If someone really has profitable stock tricks, trading advice, or secret formulas for making big money, will they advertise it on TV or sell it to you for $49 a month? No. They would shut up and earn millions without having to sell newsletters to make a living. solution? Spend less time watching financial programs and reading newsletters on TV. Spend more time developing and sticking to your investment plan.

 

Can’t see the big picture

For long-term investors, one of the most important but often overlooked things is qualitative analysis or looking at the big picture. Legendary investor and author Peter Lynch once stated that he found the best investment by observing children’s toys and the trends they will adopt. Brand names are also valuable. Consider that almost everyone in the world knows Coke; therefore, the financial value of this name alone is measured in billions of dollars. Whether it’s about the iPhone or the Big Mac, no one can object to real life.

Therefore, pouring into financial statements or trying to determine buying and selling opportunities through complex technical analysis may be effective many times, but if the world is changing bad for your company, you will fail sooner or later. After all, in the late 1980s, a typewriter company could outperform any company in its industry, but once personal computers began to become commonplace, typewriter investors of that era would assess the big picture well and divert attention.

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Evaluating a company from a qualitative perspective is as important as looking at its sales and earnings. Qualitative analysis is the simplest and most effective strategy for evaluating potential investments.

 

Trade multiple markets

Novice traders may tend to move from one market to another—that is, from stocks to options to currencies to commodity futures, and so on. Trading in multiple markets can be distracting and can prevent novice traders from gaining the experience needed to stand out in one market.

 

Forget Uncle Sam

Before you invest, remember the tax consequences. You will get tax deductions for some investments, such as municipal bonds. Before you invest, consider the investment, your tax class and the time frame of your investment, and see what your return will be after tax adjustments.

Don’t pay more than you need for trading and brokerage fees. By sticking to your investment instead of frequent trading, you will save broker fees. In addition, shop around and look for brokers that don’t charge too much, so you can retain more return on your investment. InvestingClue has compiled a list of the best discount brokers, making it easier for you to choose a broker.

 

The danger of overconfidence

Trading is a demanding profession, but the “beginner’s luck” experienced by some novice traders may lead them to believe that trading is a well-known fast-track path to wealth. This overconfidence is dangerous because it breeds complacency and encourages excessive risk-taking, which can eventually lead to trading disasters.

From numerous studies, including Burton Malkiel’s 1995 study entitled “Returns of Investing in Stock Mutual Funds”, we know that most managers will perform below their benchmarks. We also know that there is no consistent way to select managers who perform well in advance. We also know that in the long run, few people can profit from the market. So why are so many investors confident in their ability to seize market opportunities and/or select outstanding managers? Fidelity master Peter Lynch once observed: “There is no market timer in the Forbes 400.”

 

Inexperienced day trading

If you insist on becoming an active trader, please think twice before day trading. Day trading can be a dangerous game that can only be tried by the most experienced investors. In addition to being proficient in investment, successful day traders can also gain the advantages of special equipment that is not easily available to ordinary traders. Did you know that the cost of an average day trading workstation (with software) can be as high as tens of thousands of dollars? You also need a lot of trading funds to maintain an effective day trading strategy.

The need for speed is the main reason why you cannot use the extra $5,000 in your bank account to effectively start day trading. The system of online brokers is not fast enough to provide services for real day traders; literally, pennies per share can distinguish between profitable and loss-making trades. Most brokers recommend that investors take a day trading course before starting.

Unless you have the expertise, platform, and ability to execute orders quickly, think twice before day trading. If you are not good at dealing with risks and pressures, there are better options for investors seeking to accumulate wealth.

 

Underestimate your abilities

Some investors tend to believe that they will never be good at investing because the success of the stock market is only reserved for mature investors. This view is totally unreasonable. Although any commission-based mutual fund salesperson may tell you a different situation, most professional fund managers do not reach this level, and most of them underperform the market. With just a little time for learning and research, investors can control their investment portfolios and investment decisions, and at the same time make a profit. Remember, most investments stick to common sense and rationality.

In addition to having the potential to be skilled enough, individual investors will not face the liquidity challenges and indirect costs of large institutional investors. Any small investor with a good investment strategy has a chance to beat the market even if it is not better than the so-called investment master. Don’t think that you cannot successfully participate in the financial market just because you have a daily job.

 

Bottom line

If you have enough funds to invest and can avoid these beginner mistakes, then your investment can be rewarded, bringing you one step closer to your financial goals.

Since the stock market tends to generate huge gains (and losses), there is no shortage of wrong suggestions and unreasonable decisions. As an individual investor, the best thing you can do is to enrich your investment portfolio for a long time and implement a rational investment strategy that you are satisfied with and are willing to adhere to.

If you want to win big by betting your money on your instincts, try the casino. Be proud of your investment decisions. In the long run, your investment portfolio will grow to reflect the robustness of your actions.

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