Common pitfalls exist for individuals learning to trade stocks; whether it is for a living, a possible second income or just active investing for retirement. You may have run into some of the points listed below or may not even realize they are impacting your results.
Trading without a plan – This one is the simplest to overcome and why I listed it first. Sit down with a pen and pad, write out the rules of your trading strategy. Items such as; entry and exit parameters, risk/reward ratio, criteria for your stock trading candidates, and most importantly what trading style and strategy you plan to utilize.
For a more in depth analysis of this topic, check out our upcoming post titled: Ready, Fire, Aim? Having a Trading Plan is Essential.
Trading a strategy that doesn’t align with your personality – Trust me, this is real. Using a strategy that is not congruent with your personality type is equivalent to fighting an uphill battle.
From experience I can tell you I perform better with strategies where my risk is more defined. An example is options trading, whether it is outright buying or executing debit spreads; I know exactly what my maximum risk is regardless of what I do with the trade.
Being scared of risk – Make no mistake in order to make money trading you need to be willing to risk it. However, this risk should be defined (a part of your trading plan) so that your risk/reward ratio is a profitable one. Two to one is the absolute minimum a trader should look for, but four to one is ideal.
Overtrading or being addicted to volatility – Essentially, you do not want to be an action junkie. The parameters you set in your trading plan should be met in order to take on a trade. If that setup does not present itself, then simply do nothing and continue to watch your list of stock trading candidates until it does.
Not having a trading journal – Break out that pen and pad again; better yet get yourself a notebook cause on daily basis notes should be taken. Take note of items such as:
What trades did I take today and why?
Did I break any of my trading rules today?
Where there any unexpected market moving news items that impacted my trades? How did I adjust to that?
These are the type of questions you want to ask yourself as they give you the ability to go back and find recurring trends affecting your trading results.
Being aware of the items listed above will help you better prepare to trade successfully. Always remember – “Victory Loves Preparation”