Trading Mistakes to Avoid

As a trader it is always imperative to avoid / minimize mistakes and let the profits run. Its much easier said than done, here are some of the common mistakes we should try to avoid:

  • Having the belief “I am better than others” so I will always be on the winning side. This false notion makes the traders pile on position dis-regarding any risk-management process. They over-leverage their accounts and when the tide turns against them, keep on averaging ultimately leading to huge losses even for small moves in the prices as the capacity to provide MTM is reduced.
  • Going contra on the momentum stocks. It is hugely rewarding to go contra but it requires a high level of skill to understand reversion and proper risk management practice as the market can remain irrational longer than you can be solvent. I have seen scores of traders burning their figures hoping the stock would mean revert, recent cases being HDIL, United Spirits, etc.
  • Trading low probability trades, always determine the risk-reward ratio before entering a trade. Never trade a position that has the probability to wipe out your capital. When they have profit they take it off the table quickly but keep on carrying the losses hoping his original idea has to be right. They talk to other traders and seek for confirmation lacking their own self-belief.
  • Looking for the next trading tips from their trusted sources. They are not ready to do the dirty work of researching or studying price patterns, they just need the hot stock when they are just warming up. This results in burning a hole in their pocket, trading and investing are highly tedious jobs and if it were so easy to make money by listening to tips then world would have been an easier place to make riches.
  • Not developing a trading plan before starting. The ego of the traders prohibit them to devote time in learning and advancing their skills, even greats like Tendulkar / Messi devote more time on nets rather than on the field. Market in the long run teaches these traders a harsh truth and rewards those good disciplined traders.