Navigating the world of trading is rarely a walk in the park. There are a lot of variables that will come across you along the journey, and it can take a lot to overcome them successfully, especially if you are just starting out. Nevertheless, there are a lot of ways you can avoid the most common pitfalls in your early days as a trader, or at the very least, minimize their impact on your portfolio.
The best mindset to have when delve into trading is that there are a lot of mistakes to be made, and avoiding these mistakes will determine your overall success. If you are just starting out in trading, here are the common rookie mistakes that beginners make and how you can avoid them.
1. Not studying your potential broker
Choosing the first broker to work with is often the most challenging hurdle in a beginner trader’s journey. Brokers are the middlemen that execute trades. Having said that, they play a significant role in how well your investments work.
Not all brokers are made equal, and not all of them will have your best interests at heart (some may trade against you to earn more). Nevertheless, there are brokers that will put your profitability first, no questions asked, just like what true and reliable ECN brokers do.
However, you don’t just stumble into this kind of broker—you have to put in the work to find the right one. That said, studying each potential broker is the key to ensuring that your first few weeks or months of trading will put you on the right path to success.
2. Going into it without training
Even if you plan to be a passive investor, trading is not something that you can do with little to no training. Although you will learn most of the important things with experience, it pays to have a firm understanding of what you’re getting into.
Start by learning everything that you can about trading stocks, be it through books, podcasts, seminars, or just about any learning material that you can get your hands on. Having no educational background in trading nor real-life experience shouldn’t hinder you from learning how to become a successful trader. As long as you do due diligence, you can put yourself in a more advantageous position and be more prepared when you finally make your first trade.
3. Focusing on current performance
Current performance is a major factor that you should consider when choosing an asset class, strategy, fund, or broker, but it shouldn’t be the driving force behind your decision. If a certain asset class or fund has performed well in the past five years, there is no guarantee that it will maintain its performance in the next five years, or even in the next few weeks.
Instead, focus on historical performance. How well has that fund or strategy performed in the past twenty years or so? When there were dips in its performance, how long did it take to get back up again? Ask yourself these questions before investing in any asset class, fund, strategy, or manager, and you’ll find yourself making more informed decisions in the long run.
4. Being too emotionally involved
For many investors, money means security, power, or safety. While attaching these meanings to money is completely normal and oftentimes instinctual, being too emotionally involved in money can keep you from making the best financial decisions.
For instance, if a stock starts losing money and goes against a trader’s plan, they may follow their gut reaction and keep the trade as a long-term investment instead of selling it at a loss. Lo and behold, that stock loses even more money and becomes a bigger financial mistake that comes with worse emotional distress in the long run.
It can be challenging to minimize your emotional attachment to money, but like many seemingly impossible things in trading, it can be done. A great way to do this is by trading in smaller quantities to reduce potential losses, and thus the distress that comes with losing money. The sooner you start this practice, the sooner you can desensitize yourself to the emotional ties that you have with your investments.
There is no one perfect way to master the art of trading, and you’re bound to make a few mistakes along the way. Nevertheless, minimizing the risk of making those mistakes can make a huge difference and make you a better trader, even if you start with only knowledge built from self-studying and absolutely zero experience with trading.