June 19, 2024


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An expert outlines the most common trading mistakes people make and how to avoid them

Gone are the days of the stereotypical suit-and-tie Wall Street trader. The rise of trading apps and social media has ‘democratised’ trading to an extent — now, anyone with a smartphone and internet connection can get in on the action. The GameStop fiasco from earlier this year brought this notion to the forefront of the wider zeitgeist. Anyone can trade now, get used to it.

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Of course, all that glitters isn’t gold, and with a whole new world of opportunity comes a whole new world of potential pitfalls. Never has it been easier to get a slice of the pie and potentially find your fortune — and never has it been easier to lose it all from the comfort of your own bedroom. As millions across the globe enter an ever-evolving world of trading for the first time, we spoke to IG Market Analyst Kyle Rodda to get his advice on how to be smart about your investments, and navigate this new era of trading.


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Letting losses run

The wisest among us know when it’s time to call it quits. You may have lost the battle, but no point in losing the war. When things start to go downhill, sometimes the best thing to do is to cut your losses and live to fight another day. It’s easy to fall into the trap of letting losses run, but understanding when to sell is arguably more important than when to buy.

“The big mistakes all seem to stem from some of those inherent, human fallibilities almost all of us have,” says Kyle. “Not accepting you have got a trade wrong. Not accepting a loss and letting it run too long. Getting anxious and cutting your winning trades too early.”

“Not weighing risk and reward appropriately. Acting on emotion rather than with rationality. All those things are basically endemic amongst traders, especially the newer ones, and are certainly the most common mistakes made.”

So how can this be avoided? Set limits and/or stop-loss orders to manage and mitigate your risk. And remember, even the advanced trader can never know too much about risk management strategies, so no matter your experience level, it’s always worth brushing up on your trading knowledge with education resources online.

Making trades based on emotion

Never let your emotions dictate your trading, that’s a fool’s errand if there ever was one. Being swayed on emotion if an opportunity comes up could lead to underestimating risks and lead to large losses. Do your research, have a plan, come up with your own system, your own set of trading cues, and stick to it.

“The ultimate principle is to always do your own research,” says Kyle. “Apply a healthy scepticism, and always understand the risks and rewards of anything you do with your money, no matter the source of information.”

Overly concentrated positions

Don’t put all your eggs in one basket. It’s a cliché, sure, but cliches exist for a reason. Make sure you have multiple positions and never have a position larger than the amount you’re willing to lose.

“Set objectives and have a purpose: why am I doing this and what am I trying to ultimately achieve?” says Kyle. “Next is to conceive and document a trading plan: set a system for what you trade, when, why and how, and refine it and adapt it over time. Trading is a gradual and incremental process, and enjoying the process goes a long way to becoming a successful trader.”

Thinking that trading will provide an easy overnight win

The problem is we hear stories of people making it big overnight with Bitcoin or GameStop, and we’re tempted to think, hey, why not me? And that’s understandable. These people making it big seemingly overnight are human beings just like you, but they’re outliers. And most importantly, a lot of overnight successes are actually the result of careful planning and research. Sure, there will always be the person who got lucky, plain and simple, but again, don’t treat that as the norm.

“The harshest lesson is that the market is always right, and when a trade or call on a market goes wrong, that mistake rests with you and no one else,” says Kyle. “Becoming successful in financial markets, like any worthwhile endeavour, takes time and perseverance. That normally means making a lot of mistakes and placing a lot of losing trades. But that’s really the only way to get better and more profitable over time.”

Treating trading like a get rich quick scheme will (most of the time) only lead to disastrous results. Earning steady, sustainable profits can take years of practice and trial and error. This is where the value of demo accounts really shine, providing a safe environment to simulate trading, and therefore allow you to go through the inevitable period of trial and error without the high stakes of actually losing real money.

And there will be mistakes. But the mistakes are just as valuable as the profits. Learn from them, listen to industry-leading advice, put in the hard work, refine your strategy and it will pay off.

All trading involves risk. This information is general and does not have regard to the specific investment objectives, financial situation and needs of any specific person.

If you’d like to learn more about trading from industry-leading experts, check out the IG Academy.

The post An expert outlines the most common trading mistakes people make and how to avoid them appeared first on Business Insider Australia.

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