3 Mistakes Trading Beginners Can Easily Avoid
Hindsight is priceless. It has the answer to almost everything.
Just imagine the advice you’d give your younger self. Chances are your career would progress faster, your parental skills would be better, and you’d sidestep a few financial blunders.
Trading in the stock market is no different…
I began trading shares when I was 15. My approach was to go “all in” with the little capital I had. There was no thought about risk or exit plans. My goal was to make a lot of money, quickly.
Naturally, it was a disaster. I don’t think I had a single winning trade. A few stocks would surge higher. Although I’d never sell. I’d eventually ride them all the way back down.
It wasn’t until 1992 that I began learning to trade. My job at Bankers Trust put me alongside some of the best traders in the land. I was lucky. Few people get this opportunity.
Common trading mistakes
Looking back, it’s a miracle I got beyond my first few years in the market. I made all the classic mistakes many times over… the same mistakes I see beginner traders making today.
You’re probably wondering what those common mistakes in stock trading are.
Well, let’s go through them.
Here are the biggest trading mistakes that beginners often make:
1. A few big bets
Trade size is one of the biggest challenges when people start to trade. Many traders make the mistake of placing a few big trades. They believe that’s how the pros make money trading.
If you want to win big, many people believe that you have to bet big.
Now sure, this approach may work when you’re right.
But look out when you’re wrong. Just a single mistake could wipe you out.
Many professional traders take the opposite approach. Rather than having a few big investments, they risk relatively small sums across many share trades.
You see, it’s all about making sure they stay in the game. Controlling risk is critical.
There’s another advantage to this approach. The more stocks a trader buys, the better the odds of getting into some of the biggest trends.
2. Buy shares as prices fall
As humans, we tend to continue doing the things that reward us. It could be with relationships, a job, a holiday destination, or simply starting the car each morning.
Simply put: If something works, then we generally keep doing it.
But there’s a notable exception to this: Trading in the stock market.
You see, rather than buying a stock that’s doing well and rising in price, many beginner traders do the opposite — they place orders for falling stocks.
Why do traders buy falling shares?
Well it’s because they want to buy shares at the low share price. Maybe you’ve done this yourself. You watch a stock fall until it appears to be selling at a big discount. Only then do you step in to buy.
Now this may feel like a safe share trading strategy. But if you do this, you’re trading against a stock’s trend. You’re betting that a stock that isn’t working today, will start working tomorrow.
The odds of success are stacked against you.
Beginner traders who buy stocks this way, often lose their money as stocks fall further.
This short video explains what many profitable traders do instead:
3. Not cutting losses
Life often rewards us for persisting. From the classroom to the boardroom… the sporting field to the concert hall… staying the course can lead to greatness.
But this mindset could ruin your prospects as a share trader.
You see, there are times when quitting is the best thing you can do. Your survival in the stock market could literally hinge on your ability to give up when a trade isn’t working.
But for many first time traders, quitting is hard…
A common trading mistake is to doggedly hold onto losing stocks. Some beginner traders even double-down in the belief their original view will eventually be right.
But in this setting, refusing to quit can be a disaster.
I’ve seen many beginner traders fail over the years due to unwavering persistence. Their refusal to take a relatively small loss early, has led to them wiping out their account.
The best share traders avoid this fate by using a “stop-loss”.
If you’re not familiar with the term, a stop-loss is pre-set exit point. Think of it as a line-in-the-sand… a point where you accept that a trade isn’t working and quit the position.
Of all the share trading rules I can tell you, this is one of the biggest.
A stop-loss strategy is your backstop when things go wrong.
Where to invest now?
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I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.