The famous investor Warren Buffet says that the first rule of investing is not to lose money and that the second rule is not to forget the first rule. This is similar to what stock traders need to remember. The fact is that if you lose half of your trading capital on a bad trade you need to double your money and more to make it up. Remember that fees and commissions count in the business of stock trading. With the idea firmly in mind that online stock trading is a business here are our thoughts about the three worst stock trading mistakes.
Trading Based on Tips and Not Research
If there is such a thing as a sure thing in trading stocks it is probably illegal. Insider trading gets you years in Federal Prison. Trading based on stock trading tips from someone who is not an inside simply ends up in losing trades and is one of the three worst stock trading mistakes. Fundamental analysis of stocks in not limited to buy and hold investing. Trend following in day trading can be very profitable. But you need to look at trading patterns and have a basic sense of what drives the stock price besides market sentiment. Once you have a clear understanding of an evolving trend you can buy and or sell, trade options, or simply scalp for profits. One of the three worst stock trading mistakes is to assume that a trend will last forever. Keep track of what is happening during a trend, always set your trading stops, and have a strategy that alerts you as to when you should stop and reassess. If you receive a tip it may be a good one but you always need to check it out and only proceed when your own fundamental and technical analysis tells you to go ahead.
Not Following Trading Cues
Technical analysis of market price patterns is the backbone of successful day trading. You may have a very clear idea of where a stock is and where it will be due to clear changes in fundamentals. However, you still need to follow trading cues in order to execute your trades in a timely manner. One of the three worst stock trading mistakes is to ignore the market when it is virtually shouting at you to buy, sell, or simply hold.
Not Managing Trading Capital Wisely
No one is perfect and no trading strategy is perfect. This is why smart investors diversify their stock portfolios and why smart traders only trade stocks with a fraction of their trading capital. Going back to our original example, it takes a lot of work to make up for trading mistakes. No one wants the dreaded margin call when their stock trading capital no longer covers a series of trading mistakes. One of the worst stock trading mistakes is to listen to the greedy little voice that thinks you are at the casino and shouts all in when you should be backing out of a trade.
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