New traders that get into trading have a 90 to 95 percent fail rate. Meaning that less than 10 percent of people who trade stocks, aren’t successful enough to keep from losing all their money. I want shed light on three reasons why this is happening, and what you can do to avoid these simple but very important pitfalls.
So if you’re just starting with trading, you open a brokerage account, fund it and you’re off to the races. You find a stock that you heard someone talk about, you glance at its previous price and see that it has gone up $.05 in the past 10 minutes you’ve been watching it, and think if I would have just bought it 10 minutes ago I would have already made money.
You waste no more time and buy in.
The stock drops $.20 before it closes for the day. And you think it’ll come back, because they always come back. The next day. the stock opens lower and continues to go lower along with the rest of the market because of some bad news in Europe or at least according to CNBC that’s why the market declined. So you sell out at a loss frustrated and ready to give it up even though you’ve just started.
Almost everyone has seen movies, heard stories of how people make all this money in the stock market, all they do is buy low and sell high right? Of course that’s what you do, if you don’t then you’re losing money and won’t be trading very long or in any business for that matter. Bottom line is you have to make money, but here’s the thing; don’t try and make it over night. It won’t happen. No one makes a fortune overnight unless it’s handed to them.
But back to the trade. What happened? What went wrong? Well a lot, and here’s a hint it had nothing to do with the market, but everything to do with how the market was perceived. Let me explain.
Price does not determine direction.
The biggest problem often made is going into a stock based on price alone and how it moves in a very short time period. You might as well put on a blind fold and throw darts at a board hoping to hit the bullseye, or better yet just put all your money on black on a roulette table at a casino. You would have a better chance making money there.
Before you can trade you have to understand how the market works, understand why that stock moves up and down. And I don’t mean by trying to figure out what the news is saying and trying to be ahead and trade based on current events. I mean understand what happens when news hits, understand what changes as a result of the news that would cause a stock to go up or down. Find out what makes the market tick, ask yourself when there is no news or reports why does the price of a stock still move? What actually happens to cause that?
Learn how the platform works before you just go out there and expect to use it. The market is a big bully and it will take your hard earned money and not even think twice about it. So before putting yourself and your money out there, learn the basics, learn what causes the market to fluctuate.
Think of it like the ocean, there is always waves, plus there are storms and winds that may come along and make those waves bigger at times, but once the storm subsides you still have waves. There are several reasons why the ocean continually creates waves, currents is one of those reasons. The markets are no different, reports and news are the storms, but the market still moves without them, find the currents in the market, find the reason behind why the market moves without the storms.
The biggest no-no in trading doesn’t always rear its ugly head right away, sometimes it takes a while for a new trader for feel confident enough in one stock to go all in on it. Don’t do it, ever. The reason you don’t do that is it sets the trader up for failure. There are just so many things that can happen with this and a lot of individuals do not realize what could happen.
If the stock is halted you can not trade that stock move that money at all until it is released.
If the stock gaps way down you can lose more money than if you only put a portion of your account in.
You become more emotionally attached to the trade because your entire account is wrapped up in it. So you will hope that the stock will come back because you don’t want to take a large loss and the fact that you want to be right. (Nothing wrong with that it’s just human nature.)
You limit yourself from other opportunities. Especially if you are swing trading for a month at a time per trade you only have that one trade happening, If you have multiple positions you can level out and kinda hedge your trades which will make losing trades not hurt so bad.
By segmenting your account to only allow only so much of your account to go towards one single trade you take one large step towards mitigating risk. This is huge if you want to make it through the down days. You may not do this and you might get away with trading your account but it will catch up to you eventually. I found out the hard way, even though I was warned.
Hold and Hope.
Holding a losing trade in hopes it will come back often leads to money down the drain.I suffered from these kinds of trades and I know there are other traders out there that have to. So if you do, don’t feel alone, we’ve all been there. Emotions are probably the biggest downfall because they block logical outside of the box thinking. This is probably the number one reason all traders lose more than they should.
It’s so tough to keep your emotions out of it, actually it’s impossible. So you have to find ways to to minimize their effect. The best way to do this is through limit orders. To do that you set an entry level order, once that order goes off it fires two sequential orders. One to close the position if a certain price is reached to the up side and one to close the position if a certain price is reached to the downside. Choosing those levels is almost an art in itself and there are books written on the subject, I’ll have more posts to come about this later. But for now look at these stop/limit orders as a way to remove the idea of changing your mind once you’ve decided on entry and exit points. Doing this also forces you to have a plan in place for your trade. This is also key to controlling emotions as well.
In order to not end up a statistic, be sure to start with the basics.
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Learn how the market works. Understand what actually makes a stock move in the market, learn what actually changes its price. Just by taking the time to learn this will put you way ahead.
Mitigate your risk by limiting how much of your account you’re going to trade for any one trade. Then know your entry and exit points before you ever press that buy button.
If you’re just starting out and still need to build an account and still don’t know where to start, check out my three part email course, it will put you way ahead of the learn by doing method. It will help build up an account to trade with, and teach you some more ins and outs of beginner pitfalls.