Getting the first income in the stock market, novice traders often have a false idea about the simplicity of making money. The problem is especially acute if the trader has earned a large amount of money.
It is not uncommon for a novice investor or speculator to mistakenly believe that they can benefit from almost any price movement. Excessive self-confidence leads to opening a trade without the necessary analysis with a “cold” head. When the position becomes unprofitable, the situation is aggravated by the desire to recoup, usually leading to even greater losses.
A similar effect occurs in novice car drivers: after some time after getting used to driving, the driver becomes overly confident in his abilities, starting to drive faster and more aggressively. However, due to the lack of experience, it is during this period of driving that the likelihood of an accident increases sharply, which is confirmed by statistics.
The other extreme is excessive reliance on third-party sources. You can not completely and completely rely on someone else’s, even expert, opinion. Analyst recommendations can be used to confirm or “tweak” your own forecast, but nothing more.
It is impossible to learn system trading by regularly following forecasts from various sources. When testing other people’s ideas with your own money, there is a high risk of losing capital. If you are not ready to make informed decisions about trades, then you are not prepared enough to trade on your own.
Unwillingness to fix losses
When you make a trade, you expect the price to rise or fall. In case of an unfavorable price change, it is necessary to fix the loss in time, otherwise the losses increase and become uncontrollable. As a result, a growing minus can simply “get” you.
Suppose the price has reached a value at which a loss should be fixed. It may seem to you that the situation on the market will soon change, and the price will turn in your direction. But it is better to limit losses in time and not to “tolerate” the growing minus. Holding a losing position does not guarantee the return of the price to the initial value and prevents making new promising transactions. At the right time, you can reopen the position (re-enter the trade) if the price forecast remains the same.
A reliable solution to the problem of timely and quick exit from a losing trade is placing a stop order simultaneously with opening a position.
Stop orders. How to set them and whether they are suitable for all investors
More risk, more money
The higher the risk, the higher the earning potential. But the flip side of the coin is that as the risk increases, the possible losses also increase. No wonder experienced traders usually allocate no more than 1-5% of the total capital to one position.
The maximum risk can be justified only in one case – during the “acceleration” of the deposit. Due to the full use of the “shoulder”, a professional trader increases the risk to the limit and maintains it at the maximum level in order to multiply the small deposit to an acceptable size. At the same time, during the period of “acceleration” of the deposit, even a small unfavorable price change entails serious losses, up to the loss of all capital. Therefore, the strategy can only be used by experienced speculators who were able to show a good financial result with a low level of risk for a long time (from a year).
Fight the trend
Suppose stocks are dominated by an uptrend or downtrend. By opening a position in the opposite direction from the trend, the investor takes on unreasonable risks. Trying to “catch” a trend reversal simply precludes profit in the long run, since in most cases such trades will be unprofitable.
Don’t try to short stocks in an uptrend. If you feel that the fall will end soon, wait for reliable technical signals for a trend reversal to appear. Even if the company is attractive for fundamental reasons, a persistent downtrend can continue for a long time.
It is necessary to remember the key point: a strong fall of the instrument does not guarantee that the price will not go even lower. Instead of trying to take part in the formation of the “bottom” of the market, buy securities after the price has turned around confidently. With experience, you will learn to identify the moment of a trend change earlier.
Below is an example with an uptrend. After the price stops or corrects down, it may seem that the trend is about to reverse. Nevertheless, quotes continue to grow almost continuously, changing the trend only after the breakdown of a strong price level.
Position averaging is a decrease in the average position price by buying shares at a lower price. That is, if after the purchase of securities their price began to decline, the repurchase of shares reduces the average price of the entire position. The principle works similarly for a short position (selling an asset), only securities are sold at a higher price.
Never and Use this method, especially if you are not an experienced trader. Unsuccessful investments should be sold immediately – this way you fix the loss, not allowing it to grow.
The only case in which averaging can be justified is long-term investments. By buying shares of a stable company and holding them for more than a year, an investor can buy more shares at a lower price, which increases the potential profit. But since the potential loss also increases (in the event of a further drop in price), the strategy has a downside.
In order to avoid averaging, a number of investors use technical analysis. It allows you to take into account the current market sentiment and enter a deal at a better price. In this case, a price drop below a certain level tells the trader that he misinterpreted the attractiveness of the securities. In this case, it is easier to fix the loss without aggravating the situation by averaging.
Averaging in a falling market – a blunder or a successful strategy?
Unrealized profit or loss
There is a misconception that a loss (or profit) is not “real” if the position has not yet been closed. However, your portfolio is only worth what you can sell it for on the market right now. An unrecorded loss is the same loss.
Many beginners and even experienced traders are reluctant to close a losing position due to their unwillingness to accept that the price went against their forecast. Here various emotions arise, stubbornness, pride, which prevent you from calmly fixing losses. As a result, the loss continues to grow further without any guarantee that the price will return to its previous level. This can lead to excessive losses, which are then difficult to recover. It is important to realize that if the stock has fallen by 50%, then in order to reach the initial value, they need to rise already by 100%.
For various reasons, some investors highlight stocks that they find particularly attractive. It is not necessary to do this, because in the event of a collapse in quotes, it will be difficult to get rid of them in time. In general, a growing stock can become unprofitable at any time. As long as you are focused on your personal “favorites”, you are missing out on the opportunity to make money on fast-growing securities.
It must be understood that the shares of a “great” company may well not grow in the short term. Often promising stocks show mediocre course dynamics, revealing the value only on a long-term horizon. This is because fundamental analysis does not take into account current market conditions, including the interest of investors in buying certain securities.
Use of borrowed funds
In no case do not replenish the brokerage account with credit money. The loan obliges to regular repayment of funds with interest, which exerts psychological pressure. You are haunted by the idea of the need for constant earnings from the stock exchange. But this is impossible, since the market does not “distribute” money according to your personal desire, but provides an opportunity to earn money in favorable periods of time.
In trading on the stock exchange, free capital must be used. Moreover, if you adhere to high risks (for example, when trading futures with leverage), then psychologically you should be prepared for the loss of most of these funds due to unforeseen circumstances. Never trade on last or borrowed money.
By following these 10 rules, the chances of success greatly increase. If you love trading, devoting enough time to system trading and error analysis, then sooner or later you will find your own path to profit. The main thing is not to consider the market only as a source of income, otherwise failures will not be perceived as an experience, but will only lead to disappointment.