Do you want to learn the skills that will allow you to take part in the securities markets as a hobbyist, part-time, or full-time trader? If this is your first foray into the exciting world of buying, selling, investing, speculating, and aiming for profits, be careful not to fall into the most common traps, of which there are many. The good news is that you need not repeat the same mistakes most newbies make as long as you review a detailed list of what those errors are and how to avoid them.
Keep in mind that even after you feel like you know about the most frequent errors, it’s still necessary to spend at least several weeks practicing, studying, and researching your particular area of interest. So, what are the pitfalls that some beginners fall prey to? The following list pretty much covers them all. Pay special attention to the ones you aren’t at all familiar with, and try to understand how to sidestep mistakes that might be particularly dangerous for your style of trading or investing.
Not Studying the Markets
Unfortunately, of the many people who take on the challenge of trading the securities markets every week, a significant percentage of them do zero, or very little, research. This pitfall is a sure way to set yourself up for failure. The economy is like a huge machine with millions of moving parts. If you choose to buy and sell blue-chip shares, for example, it’s essential to study that niche of the corporate universe. Look at the top 10 or 20 companies, review their recent history, note which ones pay regular dividends, and consider focusing on just a handful of them in order to narrow your focus. By informing yourself of the state of the markets, you increase the chances of earning a profit.
Not Comparing Platforms
Some brokerage websites offer a wide variety of platforms from which to choose. Others have a proprietary one that serves as a kind of default for new users. Still others let account holders construct or import their own platforms. If this is your first time to trade, consider the kinds of securities you’ll be dealing with as well as your location. Then, set out to compare and evaluate among the best trading platforms in South Africa, Europe, Asia, the U.S., South America, or wherever you happen to reside.
Assuming All Brokers Are the Same
When people buy cars, houses, and major appliances, they usually shop around for a reliable, trustworthy seller as a first step in the process. The same principle applies to investors and traders. Finding a suitable broker is a must. There are two basic steps here. One is choosing a service provider that allows you to buy and sell the kinds of instruments you’re interested in, like forex, commodities, equities, etc. Step two is evaluating the credibility and fee structure of the brokerage firm you choose. Spend time reading online reviews, speaking with people in your personal network, and checking individual brokers’ websites. Note all the fine points of fees and charges so you’ll understand exactly how much it will cost you to open an account and use it.
Investing Money You Can’t Afford to Lose
Do a good amount of honest soul searching by reviewing your personal finances. Then, decide how much capital you can afford to devote to trading. Never use assets that you can’t live without, like rent money, college fund savings, or emergency cash. One of the most frequent mistakes people make is to put too much of their personal wealth at risk in the securities markets.
Going Big on Promising Setups or Doubling Down on Losing Ones
Even if you’re a relatively disciplined person and have taken the time to write a detailed set of rules for entering and exiting positions, it’s easy to feel the temptation to go big on a trade that looks great on paper. Likewise, some feel the need to pile money onto a position that’s not doing well. Odds makers call this error doubling down, or trying to save a sinking ship by adding more money to a position and hoping things turn around. A majority of the time, going big means ending the day with a big loss. How to avoid the mistake? Simply follow or automate your trading rules so that the temptation never arises. Better to limit losses than give them a chance to get worse. Never dig a hole for yourself. Instead, once your loss limit is reached on a given transaction, get out and move on to the next opportunity.