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.
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.
Share Market Knowledge Centre
- Demat account
- Share market
- Trading account
- Online share trading
- Intraday trading
- Futures trading
- Commodities trading
- Currency trading
Things You Need to Know About Pay Only When You Profit
While trading in the share market, you must know about the different charges. These include transaction charges, commodity transaction charges, stamp duty, brokerage charges, etc. It is also vital to understand how each of these charges is calculated respectively.
How can I Trade with Zero Brokerage?
When you decide to start trading in shares, there are a few accounts that need to be opened. First, you need a Demat account where the securities will be stored. Next, you need a trading account online with a stockbroker registered with the exchange where you want to trade. And finally, you need a banking account linked to your Demat and Trading accounts.
What is Trading on Equity?
Trading on equity, also called financial leverage, is a process through which a company incurs new debt in bonds, loans, preferred shares, or debentures to acquire additional income. On this, it can earn greater returns than the interest created by the debt.
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.