Mistakes that Must Be Avoided While Trading Online | Espresso

Mistakes To Avoid while Trading to Reduce Loss-Making Trades

When you talk about investing in the stock markets, risks are the first things that come to mind. And, it’s true. Stock markets are high-risk zones since the stock prices can change within seconds based on any social, political, or macroeconomic event. 

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As an investor, it can be overwhelming to keep track of all events that can impact the stock markets and/or the particular stocks held by you.So, how do you avoid loss-making trades? In this article, we will talk about some common mistakes to avoid while trading to keep loss-making trades at bay.

 

Some Mistakes to Avoid While Trading to Reduce Loss-Making Trades

1. Choosing the wrong trading account

When you decide to start trading in shares, you need to open a trading account with a broker registered with the exchange. While opening a trading account, it is important to keep an eye on the brokerage structure as it can have a direct impact on your profits. Hence, make sure that you open a trading account with a broker that offers flexible and competitive brokerage plans.

2. Banking too much on past performance

This is a tricky one. The only way to analyze the performance of a stock is to look at its past performance. However, the past is not an indication of the future. Just because a stock price reached say ₹100 and jumped to ₹600 in the past does not mean that it would do so again. Hence, it is important to understand why the jump happened in the past and analyze its current performance in an unbiased manner.

3. Taking too many risks

Every trader will have a risk tolerance level. Beyond this point, he/she can start panicking and make hasty investment decisions that can lead to losses. While the latest small-cap stock might be in the news for being the next multi-bagger, if you don’t have the risk appetite to handle the volatility that comes with small-cap stocks, then staying away can be a wiser decision. Remember, success in the stock market comes from taking data-backed informed decisions and keeping emotions at bay.

4. Ignoring the power of Stop Loss orders

A Stop Loss order is a boon to traders. It can help avoid emotion-driven decisions and help them stick to their trading plans. Before you enter a position, determine the maximum loss you are willing to take for a pre-determined profit margin. By using a stop-loss order, you can ensure that your losses are limited at the pre-set levels.

5. All eggs in one basket

When you are trading in stocks, it is important to remember that these are high-risk investments, and if the market moves contrary to your expectations, losses can be heavy. Hence, it is prudent to spread your money across shares of different sectors that help minimize the risks. Putting all your money into one stock can be a very high-risk strategy.

6. No identifying the ‘Quitting’ point

Seasoned investors know when their position is wrong and quit swiftly with minimal losses. New and inexperienced investors tend to hold their positions, hoping the trend to reverse. While this may happen once or twice, as a strategy, this can be risky and cause losses. Ensure that you know when your assessment was wrong and quit your position with a minimal loss.

7. Following trading tips blindly

The internet is full of trading tips, with experts and fellow traders offering advice on which stock is expected to rise/fall over the next few days. While we don’t say that all these tips are wrong, following them blindly can be counterproductive. Hence, make sure that you avoid the herd mentality and trade in stocks that you understand.

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Frequently Asked Questions

First things first, a Stop Loss order can help contain losses in day trading. Let’s say that you buy a stock for ₹100, hoping that the price would rise by afternoon. However, the market moves contrary to your expectations, and the stock price falls to ₹90 by noon. Will you sell or wait for the price to rise? What if it falls to ₹80? ₹70? The question is, how long will you wait before telling yourself that you made the wrong decision?

When you use a Stop Loss trading strategy, you decide the amount of loss you are willing to take at the time of placing the buy order. However, you need to remember that the stock market is volatile, and prices can fluctuate. Hence, avoid being too cautious, else you might ruin any chance of making a profit.

It takes only one mistake to turn a potentially profitable situation into a loss-making one. While there are many common mistakes made by traders, we would say that one of the biggest mistakes to avoid while trading would be taking too many risks. Investors should assess their risk tolerance levels and enter trades where they can handle the volatility.