August 8, 2022

Tips For Stock Traders: How To Avoid These 4 Common Mistakes

According to popular estimates, over 90% of stock traders fail. When you break the numbers down even further, they’re more staggering – about 40% only trade for one month, and 80% quit after two years. Only seven percent will continue trading after five years.

So it begs the question – why do most stock traders fail?

From mismanaging risk to using outdated methods, these are four common mistakes every stock trader makes that you should know how to avoid.

Organization & Preparation

One of the most common mistakes stock traders make is having little or no diligence. You must know how, when, and what you’re going to trade. If you solely rely on emotions and gut instincts without at least researching the companies in your portfolio, you’re basically gambling – and we know the house always wins.

Find a trading system that’s compatible with your strengths and goals. All traders need an edge, and many formulas can predict a stock’s movement with up to 55-60% accuracy. Traders also benefit from the guidance of a coach or mentor – many of whom typically have a go-to strategy that’s easy to teach. A lot of coaches host training sessions to demonstrate their favorite trading strategies. They allow traders of all experience levels to participate in hands-on instruction, and directly interact with coaches.

Imagine having access to a seasoned trader who can answer your questions and nudge you in the right direction? That’s exactly why Prosper Trading Academy exists – to help take the guessing out of trading. While no guarantees exist, this type of advantage can assure you’ll always have the odds of any trade stacked in your favor.

Risk Management

The consequences of mismanaging risk go both ways. You can either lose out on profitable opportunities, or suffer crippling irreversible losses. Risk management in trading is pretty cut and dry – don’t put all your eggs in one basket, take nothing for granted, set reasonable parameters for taking gains and cutting losses.

Despite the tempting prospect of lucrative payouts, your holdings in one position shouldn’t jeopardize your entire account. If you have a $10K balance for example, and dump $5K into one stock, it could spell disaster if that asset plummets. Buying just $1K of shares, however, makes a potential loss more absorbable, and any gains worthwhile. Although too much risk is never ideal, not taking enough can also be detrimental. Your account won’t grow if you’re only investing 1-3% of your funds in each position. Especially if your system’s metrics say so, sometimes it pays to venture out of your comfort zone.

If you don’t quite trust your risk management capabilities, try services like Live Trade Signals – dynamic notifications coaches send that tell you what price to enter a trade, which spread to use (if you’re trading options), and when to exit.

Discipline

Hope, greed, fear, and regret are the four main emotions that cause people to make wrong decisions, hence why undisciplined trading practices are so abundant. Successful stock traders stick to the same proven processes and routines. They make trades that satisfy their strategy’s requirements, and don’t veer off the beaten path.

Two big causes of undisciplined trading are lengthy drawdowns, and traders making unnecessary changes to their formulas. The mounting frustration caused by drawdowns can make traders become compulsive, ignore plays signaled by their mainstay strategies, and start using unfamiliar unproven systems. Simply put – if it ain’t broke, don’t fix it, no matter how green the other side’s grass looks.

Sometimes when you’re in the midst of a losing streak, the best move you can make is to not even trade. Prosper Trading Academy CEO Scott Bauer always says “There will always be another trade. There will always be another opportunity to earn in the market.”

Ignorance

That proverbial saying “ignorance is bliss,” especially applies to trading. Many traders are enticed by so-called online “gurus” claiming their XYZ system can readily generate over 10-20X profits. As a result, trading attracts too many venture seekers who are solely focused on the prize, and unaware or ignorant of how much hard work is required.

Some traders succumb to a sensation called random reinforcement. This happens when someone attributes their capabilities to an outcome’s success that was actually sheer luck. Random reinforcement causes countless traders to unravel because of the hard-to-break habits they develop. Even traders with successful systems are susceptible to their own ignorance. Market conditions always change, and your strategies should always be up to date.

Remember, the market waits for no one. You’ll be left in the dust if you don’t adapt.

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about the author:

Charles Moon

Charles Moon is a technical "whiz kid" whose experience lies in scalp/swing trading. A patient educator, Charles excels at coaching/mentoring and can make complex concepts simple. Prior to joining the ranks of Prosper Trading Academy, Charles was a proprietary equities trader with Great Point Capital LLC. Coming from a retail trading background, his experience can help those with no experience trading to seasoned veterans.

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