Here is a list of five of the most common trading mistakes:
1. Buying Too Late
2. Not Selling When Stock Drops 10%
3. Selling Too Late
4. Selling Too Soon
5. Buying a “Good” Company Just because it’s Good
1. Buying Too Late
The cause? Not enough research.
This is a very common problem for beginners. When you see a stock that has made a ten-percent gain for the month or year, you think to yourself, “Wow, this stock looks really good.” The problem is, this stock may have gone up because of good news and you have already missed out on the profits. You may have bought the stock at the peak and it is quite possible it will start dropping soon. It is human nature to want to buy a stock that shows a green, positive gain with a beautiful-looking chart.
The solution? You may have heard the saying, “Buy the Rumor, Sell the News.” As an example, there is a rumor that Big Company wants to buy Small Company. That may be a good time to buy Small Company because it will most likely go up in price if the merger goes through. However, by the time the official news comes out about the merger, the stock price has already gone up and there is not much gain to be made. In fact, you could lose money if the merger is cancelled and the stock prices drops back to normal.
2. Not Selling When Stock Drops 10%
The cause? Too confident or prideful.
I have had a lot of winning trades in my day. I have had a lot of losing trades too. If I do not close out the bad trades soon enough I can easily have a losing record. You can “go down with the ship”, holding on to a bad stock to prove to yourself and others that “you were right” that it is a good stock that will come back up. Unfortunately, this is one of the top reasons traders lose a lot of money.
The solution? Make a rule for yourself that when a stock drops ten percent from where you bought it, sell it! And do not break your own rule!
3. Selling Too Late
The cause? Too greedy.
This is another common problem. It is human nature to want more and more profits. So instead of selling our stock for a reasonable gain, we hold out and wait for more. What happens then? Quite often, the stock will start dropping, and after we have lost most of our gains, we sell it.
The solution? Do not be greedy! Sell it when it looks like it is going to make a significant drop. After all, you cannot control the stock to make it do what you want!
4. Selling Too Soon
The cause? Too scared.
Conservative traders tend to exit their trades sooner than more aggressive traders do. Maybe they decided ahead of time to sell when they have a five- or ten-percent gain. This can be a good, safe strategy, but you might be leaving large profits on the table. For example, Google had their IPO at $85 per share and now they are over $700 per share. If you sold your Google stock early, you missed out on HUGE gains!
The solution? Try to estimate how high the stock could go long-term based on the company’s growth expectations and do not short-change yourself.
5. Buying a “Good” Company Just because it’s Good
The cause? Not enough research.
You may be tempted to buy stock in one of your favorite companies simply because it is a good, solid company. However, the company’s stock may be in bad shape. It may be way overpriced, and if you buy it now you could lose a lot of money if the stock drops.
The solution? Look for good companies but do your research first!
You can help yourself by learning from the mistakes of others. Then, as you make your own mistakes, write them down in a trading log and learn from yourself!
Nicholas Swezey is the creator of the Stock Market Game at http://www.HowTheMarketWorks.com
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