12 Common Investing Mistakes and How to Handle Them
By Mike Mc Mahon | January 16, 2020
There are a plethora of mistakes that beginning, and even experienced, investors and traders often make. The good news is that a great many of them are avoidable if the investor or trader is informed and prepared.
12 Common Mistakes Investors and Traders Make
Buying the wrong stock
Traders who accidentally buy the wrong stock shouldn’t sell in a panic. They should instead do a quick assessment to see if the trade is going for or against them (maybe it will be a winner!).
The first step is to determine the spread and possible exit points, and then check to see if momentum is going in the right direction. If the stock is headed in the right direction, they might want to let it run, trade into the momentum and take a quick profit. If it is headed the wrong way, it might be best to exit quickly, without wasting time to rationalize or justify the trade.
Panicking when the computer system goes down
No system is immune to occasional interruptions. Whether the source of the problem is the internet connection, trading software or the brokerage, it is advisable to avoid trading until it is fixed.
Those with an open position shouldn’t panic as it will only cloud their judgment, possibly resulting in irrational decisions. Traders should know what open positions they have and write them on a piece of paper to save time and confusion when calling the Trading Desk. Be sure to have their number on speed-dial in case of emergencies like these.
Waiting too long to sell
Believe it or not, many people have trouble closing out a profitable trade. It is a greed problem. When showing a large profit, traders should typically go ahead and take the money! Choosing to wait may result in the profit disappearing. This is a common trading mistake for many investors. Don't end up saying, “I should have sold when I was up."
Holding on to a failing trade
There is only one thing to do with a failing trade – get out! You can't win 'em all. As a reminder, a big and costly loser usually starts off as a small one. Without a proper protective stop loss order, a trader’s account is at risk.
Short-selling a stock without proper caution
If someone tells you to short a stock, don't act on it on just on their say so! Instead, observe the stock and see what you can learn. There is no such thing as a Hot Tip.
Trading in a situation where you cannot concentrate
Trading in a distracting situation can be dangerous. It is better to pass up the trade than to make a mistake and end up losing a substantial amount of money. A trading space should be calm and free of distractions. Close the door if possible and turn off the ringer on both the cell and home phone.
Continuing to trade in a bad trading streak
When a trader has had more than 3 losers in a row, it's time to reevaluate. It’s advised to step back, relax and see what went wrong. Traders should always avoid trading to “make back the money". Always remember to take it one trade at a time. That last loser shouldn't influence the next position.
Traders with 10 transactions by the middle of the day are probably over trading. Practice discipline and decision-making skills by making quality trading decisions. Trading is not a contest to see many trades can be fired off in a day or an hour; it is a disciplined process of choosing high probability trades. Even after becoming an ace at execution skills, traders must continue to practice and learn because the financial world is always changing. Staying educated about the changes in the markets is a key component to continued consistency.
Not Anticipating Volatility
A premarket warmup is required prior to trading, every day. Traders need to be aware of any potential upheavals that may be caused by news events, economic reports and even unusual weather. These can all change the pace of the market, making it too fast for their skill level. Being aware of personal limits in execution and position sizing can reduce the risk of taking bad trades.
Not Journaling All Trades
Trading should be treated like a business which means traders need to keep concise records of all transactions. Most of the brokerages will help with the basic history, but it is also important to track why the trade was placed, noting how the trade made them feel and why the trade was closed. These questions will help over time because it isn’t possible for most people to remember all of their trades, so being able to read about them later will allow a detailed review of what is working and what isn’t.
Not Using a Trailing Stop to Protect Profit
Trailing Stops are available on most electronic trading platforms and can be used to avoid losses and protect profits. Once achieving a 1:1 reward to risk ratio profit, moving the initial stop to breakeven (entry + commission/fees) will prevent the trade from becoming a loser. Then the trader can trail by a percentage of money based on the Average True Range Indicator to secure profits as they are made.
Listening to the Media – They Are Not There To Help Traders
Understand that the financial programs from the media – TV, radio, internet or paper – are trying to sell something. Their purpose is not to help investors and traders to make low risk decisions. Most often it’s distracting noise that often confuses traders instead.
To learn strategies for tuning out the noise and making informed trading and investing decisions, sign up for Online Trading Academy’s introductory class.
About the Author
Mike Mc Mahon
Mike Mc Mahon was a co-founder of Online Trading Academy in 1997 and was Director of Education for 13 years. He is well versed in economics and has addressed the London School of Economics and participated in the Salon de L'Analyse in France. Though officially retired, Mike fulfills his passion for sharing knowledge by remaining a member of Online Trading Academy's content team.
This content is intended to provide educational information only. This information should not be construed
as individual or customized legal, tax, financial or investment services. As each individual's situation
is unique, a qualified professional should be consulted before making legal, tax, financial and investment
The educational information provided in this article does not comprise any course or a part of any course
that may be used as an educational credit for any certification purpose and will not prepare any User
to be accredited for any licenses in any industry and will not prepare any User to get a job. Past
results are not a guaranty of future performance.