....and how to avoid them !!!!!!!
(Copied from the Internet)
When active traders and investors lose money on the stock exchange it can almost always be traced back to bad decision making, poor discipline and ignoring the fundamentals of share trading, according to Bourse Data, leading independent provider of market data, financial planning website services and tools for serious traders.
“Investors who stick with a sound trading strategy should not be losing all of their money on the stockmarket”, said David Galtieri, business development and training manager at Bourse Data.
According to Bourse Data, the 10 most common trading and investing mistakes are:
1. Trading against a trend
2. Not adhering to a ‘stop-loss’ position
3. Trying to make losses back by taking greater risks
4. Letting a profit turn into a loss
5. Overtrading
6. Lack of diversification
7. Attempting to trade out of a difficult position
8. Not having defined objectives
9. Lack of discipline
10. Knowing it all
Trading against a trend
Investors ignore price trends when trying to pick the absolute peaks and troughs of stocks. “Nobody has ever been able to achieve this on a regular basis”, Mr Galtieri said. “Investors should only go with established trends.
“In fact the largest moves in the market are moves that go in the same direction as a trend, so holding out for a position to hit its absolute high or low is misguided”, he said.
Using a charting tool to monitor stock movements, along with learning the techniques for identifying price trends, will help prevent investors from trading against a trend.
Not adhering to a ‘stop-loss’ position
“Everybody will make an incorrect call, or the market will move unexpectedly”, Mr Galtieri said. “Investors, particularly active investors, must have a predetermined stop-loss limit in place.”
A stop-loss is a predetermined price point at which a loss is accepted and an investor closes the position. According to Mr Galtieri, the decision to set and act on a stop-loss position is another technique that nullifies the emotions of investing and trading.
A stop-loss can do more than prevent losses—they can also ‘lock-in’ profits. By implementing a ‘trailing stop-loss’—where a stop-loss is raised in line with upward price movements—an investor avoids the possibility of a stock sliding back to their original entry price, or worse.
Trying to make losses back by taking greater risks
It can be tempting to take bigger risks in order to make a loss back quickly. “This is a classic investing mistake that is driven by emotion and can cause the rapid erosion of capital”, Mr Galtieri said.
“Sometimes it is driven by overconfidence, where an investor throws out the rule book and trades on instinct. Other times investors can be so attached to a position that they seek revenge on the stock or the market, which is disastrous.
“The market is indifferent, so denying a loss or blaming the market for it is pointless”, Mr Galtieri said. “Investors need to move on and objectively review their trading and investing plans, as they may need adjusting.
“This mistake is essentially about investors who do not learn from their losses. Accept that losses are inevitable and part of your investment education”, he said.
Mr Galtieri believes the key to managing losses is to keep a diary monitoring all trading positions. Investors can then refer to their diary and adjust their strategy.
Letting a profit turn into a loss
Most traders have a story about massive ‘paper profits’ that soon dwindled to become losses. Usually it is because investors have been mesmerised by one of the strongest investment emotions—greed—which has motivated them to hold onto the stock for too long, anticipating even higher gains.
“They expect the profits to keep on coming and fail to see that they have already made a tidy profit already”, Mr Galtieri said. “They also forget that it’s only a profit in theory until you take it.”
Mr Galtieri explained that investors can avoid this mistake by having a trailing stoploss in place.
Overtrading
Overtrading is when an investor takes a position because they feel obliged to. Often they will break their own rules in order to get all of their capital into the market. “In this case they’re seeing opportunities that don’t really exist”, Mr Galtieri said.
“Investors need to be patient and wait until the right opportunities come up”, he said.
“If an opportunity does not meet your strict set of rules, then it is possibly better to keep your money in the bank until the time is right.
“Even if an opportunity is missed, there is no reason to try and create one.
Opportunities come up every week.”
Trading and investing rules should be converted into a physical checklist, so investors can literally tick all of the boxes before buying a stock.
Lack of diversification
Diversification of assets helps to prevent an investment pool from going down if one investment goes sour. Asset allocation rules, such as no more than 10% or 20% in a position, helps an investor to run a diversified portfolio. These rules will vary according to an investor’s comfort level and trading capital.
Attempting to trade out of a difficult position
Investors may become desperate with financial troubles, such as high debt combined with a low income. “Often investors have broken a rule somewhere, such as ignoring diversification, and then been hit with a financial hardship such as a job loss”, Mr Galtieri said.
“Desperation leads to rash decisions and sometimes a gambling mentality, which leads to capital being lost quickly”, he said. “If you are in financial difficulty it makes no sense to borrow for shares. It’s much better to see a financial counsellor and start saving before investing or trading.
“The key is to have a predetermined strategy. Investors should plan out scenarios and have a back up plan”, he said.
Not having defined objectives
If objectives are unknown there is the danger of carrying an inappropriate level of risk, and it is ultimately impossible for investors to know if their investments are successful. Objectives need to be discussed with families/partners and financial planners. Investors may have a number of different objectives with different time horizons,
which each require different strategies and a different size capital base. “Successful investors know what they are investing for,” according to Mr Galtieri.
“The reasons have to be big enough to make an investor want to keep doing it and learn from it. Just wanting to own a luxury car is not enough, an investor’s goals should be bigger than that, because it’s short-term and if things go wrong then it’s easy to just go back to your old car and forget about investing.”
Solid reasons to invest are subjective, but may include financial security, wanting to own a home or send children to private schools.
Lack of discipline
When trading and investing, it is essential to have a list of specific criteria that must be passed before taking an opportunity.
“Without a set of rules you are gambling”, Mr Galtieri said. “A check list can help investors stay disciplined, so that even if just one box on a checklist was not ticked, they will pass on that opportunity. It takes the emotion out of decision making.”
Knowing it all
After a run of successes it’s easy for investors to think they have it all worked out, and that is often when the market will bite them back. Mr Galtieri recommends that investors keep learning through organisations such as the ASX and specialised training courses, and that they take advantage of the many good books on the topic.
“Investors should look for programs that offer backup, support and the opportunity to repeat modules”, Mr Galtieri said.
Investment seminars have recently been under scrutiny for misleading investors, yet Mr Galtieri believes that most seminars are based on sound principles and do not encourage investors to ‘gamble’ their money.
“It’s often a case of a customer not sticking to the required discipline. Usually what they have learnt at the seminar is fine, and then they start to ignore the process, make emotional decisions and get into trouble”, he said.
(Copied from the Internet)
When active traders and investors lose money on the stock exchange it can almost always be traced back to bad decision making, poor discipline and ignoring the fundamentals of share trading, according to Bourse Data, leading independent provider of market data, financial planning website services and tools for serious traders.
“Investors who stick with a sound trading strategy should not be losing all of their money on the stockmarket”, said David Galtieri, business development and training manager at Bourse Data.
According to Bourse Data, the 10 most common trading and investing mistakes are:
1. Trading against a trend
2. Not adhering to a ‘stop-loss’ position
3. Trying to make losses back by taking greater risks
4. Letting a profit turn into a loss
5. Overtrading
6. Lack of diversification
7. Attempting to trade out of a difficult position
8. Not having defined objectives
9. Lack of discipline
10. Knowing it all
Trading against a trend
Investors ignore price trends when trying to pick the absolute peaks and troughs of stocks. “Nobody has ever been able to achieve this on a regular basis”, Mr Galtieri said. “Investors should only go with established trends.
“In fact the largest moves in the market are moves that go in the same direction as a trend, so holding out for a position to hit its absolute high or low is misguided”, he said.
Using a charting tool to monitor stock movements, along with learning the techniques for identifying price trends, will help prevent investors from trading against a trend.
Not adhering to a ‘stop-loss’ position
“Everybody will make an incorrect call, or the market will move unexpectedly”, Mr Galtieri said. “Investors, particularly active investors, must have a predetermined stop-loss limit in place.”
A stop-loss is a predetermined price point at which a loss is accepted and an investor closes the position. According to Mr Galtieri, the decision to set and act on a stop-loss position is another technique that nullifies the emotions of investing and trading.
A stop-loss can do more than prevent losses—they can also ‘lock-in’ profits. By implementing a ‘trailing stop-loss’—where a stop-loss is raised in line with upward price movements—an investor avoids the possibility of a stock sliding back to their original entry price, or worse.
Trying to make losses back by taking greater risks
It can be tempting to take bigger risks in order to make a loss back quickly. “This is a classic investing mistake that is driven by emotion and can cause the rapid erosion of capital”, Mr Galtieri said.
“Sometimes it is driven by overconfidence, where an investor throws out the rule book and trades on instinct. Other times investors can be so attached to a position that they seek revenge on the stock or the market, which is disastrous.
“The market is indifferent, so denying a loss or blaming the market for it is pointless”, Mr Galtieri said. “Investors need to move on and objectively review their trading and investing plans, as they may need adjusting.
“This mistake is essentially about investors who do not learn from their losses. Accept that losses are inevitable and part of your investment education”, he said.
Mr Galtieri believes the key to managing losses is to keep a diary monitoring all trading positions. Investors can then refer to their diary and adjust their strategy.
Letting a profit turn into a loss
Most traders have a story about massive ‘paper profits’ that soon dwindled to become losses. Usually it is because investors have been mesmerised by one of the strongest investment emotions—greed—which has motivated them to hold onto the stock for too long, anticipating even higher gains.
“They expect the profits to keep on coming and fail to see that they have already made a tidy profit already”, Mr Galtieri said. “They also forget that it’s only a profit in theory until you take it.”
Mr Galtieri explained that investors can avoid this mistake by having a trailing stoploss in place.
Overtrading
Overtrading is when an investor takes a position because they feel obliged to. Often they will break their own rules in order to get all of their capital into the market. “In this case they’re seeing opportunities that don’t really exist”, Mr Galtieri said.
“Investors need to be patient and wait until the right opportunities come up”, he said.
“If an opportunity does not meet your strict set of rules, then it is possibly better to keep your money in the bank until the time is right.
“Even if an opportunity is missed, there is no reason to try and create one.
Opportunities come up every week.”
Trading and investing rules should be converted into a physical checklist, so investors can literally tick all of the boxes before buying a stock.
Lack of diversification
Diversification of assets helps to prevent an investment pool from going down if one investment goes sour. Asset allocation rules, such as no more than 10% or 20% in a position, helps an investor to run a diversified portfolio. These rules will vary according to an investor’s comfort level and trading capital.
Attempting to trade out of a difficult position
Investors may become desperate with financial troubles, such as high debt combined with a low income. “Often investors have broken a rule somewhere, such as ignoring diversification, and then been hit with a financial hardship such as a job loss”, Mr Galtieri said.
“Desperation leads to rash decisions and sometimes a gambling mentality, which leads to capital being lost quickly”, he said. “If you are in financial difficulty it makes no sense to borrow for shares. It’s much better to see a financial counsellor and start saving before investing or trading.
“The key is to have a predetermined strategy. Investors should plan out scenarios and have a back up plan”, he said.
Not having defined objectives
If objectives are unknown there is the danger of carrying an inappropriate level of risk, and it is ultimately impossible for investors to know if their investments are successful. Objectives need to be discussed with families/partners and financial planners. Investors may have a number of different objectives with different time horizons,
which each require different strategies and a different size capital base. “Successful investors know what they are investing for,” according to Mr Galtieri.
“The reasons have to be big enough to make an investor want to keep doing it and learn from it. Just wanting to own a luxury car is not enough, an investor’s goals should be bigger than that, because it’s short-term and if things go wrong then it’s easy to just go back to your old car and forget about investing.”
Solid reasons to invest are subjective, but may include financial security, wanting to own a home or send children to private schools.
Lack of discipline
When trading and investing, it is essential to have a list of specific criteria that must be passed before taking an opportunity.
“Without a set of rules you are gambling”, Mr Galtieri said. “A check list can help investors stay disciplined, so that even if just one box on a checklist was not ticked, they will pass on that opportunity. It takes the emotion out of decision making.”
Knowing it all
After a run of successes it’s easy for investors to think they have it all worked out, and that is often when the market will bite them back. Mr Galtieri recommends that investors keep learning through organisations such as the ASX and specialised training courses, and that they take advantage of the many good books on the topic.
“Investors should look for programs that offer backup, support and the opportunity to repeat modules”, Mr Galtieri said.
Investment seminars have recently been under scrutiny for misleading investors, yet Mr Galtieri believes that most seminars are based on sound principles and do not encourage investors to ‘gamble’ their money.
“It’s often a case of a customer not sticking to the required discipline. Usually what they have learnt at the seminar is fine, and then they start to ignore the process, make emotional decisions and get into trouble”, he said.
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