Trading and Investing

5 Mistakes New Traders Make

While opening the demat accounts of new traders, we see a lot of excitement, aggression and bullishness in them. We ask them which instruments do you plan to trade, they say Futures & Options. We ask them do you know how to analyse charts and take trades based on them? They say not really. In this article we will highlight 5 common mistakes which we see every newbie making in the market.

Stock markets have caught the fancy of many people over the ages. Almost everyone must have tried dabbling in stocks much to the disgust of their family. Most of the people have burnt their hands in the markets and gone on to blame operators and tooth fairies for their mistakes. You had a capital of 50,000 and on day 1 you start trading stock futures and a week later your capital is 25,000. The fault is yours, not the markets!

1) Trading futures and options in the beginning:

High Expectations...

Every trader will see some beginners luck which will sooner or later fade away and losses will set into your account. When you are new to the markets, you shouldn't go beyond risking an amount you don't mind losing and all you should trade is positional cash. Futures and Options are instruments which can bring down big financial institutions, how do you think you will mitigate that risk?

The desire to trade in F&O shows a dangerous level of greed. You should first learn to manage risk, analyse charts, lose some cash as fees to the market, improve your maturity levels, get your emotions under control before you start exploring F&O. Usually, 18 months in cash segment will make you enough mature to start exploring F&O.

Every active trader has melted capital trading F&O and will keep doing so unless rightly guided to. Your broker will never tell you not to do it! It's the law of the jungle.

2) Your money, his knowledge:

If you were to buy a car, will you ask a random to go the showroom, check out all the models and then will you buy whichever car he suggests? Well unless he is a proven car expert you won't. Even if he is an expert you will atleast have a look right?

It's your hard earned money! Think of all the pain you have endured to earn your money, think of the purpose it should be solving - Daughter's education, Retirement plans, Health requirements, etc. How can you risk all this  money on trading based on someone else's tips? Yes! There are a few good advisory firms out there but most of them are one's with fake girls display pictures on facebook who promise 80%-90% accuracy. Donate money for charity rather than blowing it up on them.

If your advisor suggests you something, check if he is putting his money there too! Check the logic behind the same, it will help you gain knowledge too.

Also, the cost of choosing a wrong broker is very high. High brokerage rates will eat into your profits and also multiply your losses significantly. And the worst  part is your broker will want you to keep doing this as this is how he will make money. Those opening their brokerage account through us can be assured that this won't happen to them as the rate is one of the lowest in the country!

You really think so?

3) Trader to investor to trader to investor to... Fixed Deposit:

Mr. X saw the movie Wolf of Wall Street and decided to be a cool trader. He opens a demat account and buys 10,000 shares of XYZ Ltd because he feels the stock could go up in the short term by 100% to 200% and he will be rich soon. The stock goes starts going down and loom what happens:

  • Stock down 5% - Just a little correction, will trap the bears and squeeze all life out of them!
  • Stock down 10% - 200 DMA will come to the rescue, bulls will rule!
  • Stock down 25% - Fibonacci retracement will provide support and stock will go up!
  • Stock down 50% - Reads Warren Buffet's philosophy on investing and holding companies for long term. Also gets his hands on company's annual reports and starts analysing the fundamentals.
  • Stock down 90% - Stock market is gambling, utter waste of time. Operator destroyed the stock.

Meanwhile, his portfolio will be full of junk stocks like these.

Now take another situation where Mr. X reads DalalStreetBull's portfolio pick column and buys a stock called ABC which DSB has suggested for 15% returns p.a. He has decided to hold the stock for the next 4-5 years. That week the stock rises 10% and he immediately books the profit to lock the gains. His purpose was defeated.

This is Greed and Fear - The major elements of trading psychology. Greed is holding losing positions to not lose money. Fear is booking profits early as you are scared that "Jo aaraha hai, utna bhi nahi ayega"

Eventually, unless these 2 gentlemen, unless they learn from their mistakes, will lose their hard earned money and end up putting everything in Bank FD's for 6%-7% p.a. post tax returns.

You don't want to be on the wrong side of the market...

4) Analysis Paralysis:

A few newcomers realise that they need to learn analysis of price movement to become successful in trading. They start following blogs of successful traders. Some of these successful traders use RSI, some use Moving Averages, some use price action, some use MACD. So these hungry-to-learn newcomers load up their charts with RSI, Stochastic, MACD, Moving Averages, Candlesticks, Bollinger Bands, etc (Surprisingly they manage to not faint seeing these charts). What follows is an analysis paralysis. They forget their aim to make money trading and unknowingly get stuck in the maze of over-analysis. For successful trading you need simple techniques, good money management rules, the right attitude and a level of ego which lets you accept that you have made a mistake. It takes years for these newbies to realise this. Our Technical Analysis Course has been designed keeping this in mind. Why break your head if it is a hammer or doji or hanging man?

Rather toss a coin to decide BUY/SELL than look at this chart!

5)  ___________________ :

Fill in the blank with a mistake you made that I haven't mentioned. Everyone of us has made mistakes. Some of us have learnt from it, some of us have not. So this blank is yours to fill. Think of the mistake you made in your trading & investing career, then think if you have taken the right steps to not make these mistakes again. If you haven't it still isn't late.

Correct your mistakes as soon as you realise them..


Open your Zerodha trading account through us and trade at Rs. 20 per trade and get access to our premium technical analysis videos, guidance and market analysis videos.

For details click here.

Powered by Blogger.