Pity the fool … who loses big in the stock market!
Listen, nobody wants to lose money in the stock market. However, it’s an unfortunate fact that many traders will lose money, especially if they’re new to the market.
Because the market is ever fluctuating, a certain degree of loss is inevitable for traders of all levels. However, you can learn to cut your losses with diligence and common sense.
In celebration of April Fool’s Day, this post details some of the most common reasons traders lose money — and how you can take proactive steps to avoid them.
Click here to download the key points of this post as a PDF
Losing Money in the Stock Market
You’ve probably heard that somewhere around 90% of all new traders fail. While it’s true that the failure rate is high, this isn’t necessarily because trading is impossible or that the system is stacked against you.
Usually, it’s simply due to a lack of proper education and preparation. Don’t play the part of the fool! Read on to beef up your trading knowledge.
Why People Lose Money in the Stock Market
Say you decide to go skydiving. To ensure safety, you’d probably take some lessons first, like how to open the chute and tips for what to do in case of emergency. And yeah, you’d do it before the jump.
After all, it’d be pretty dangerous to just jump out of a plane without having a clue as to what to do next.
Trading might not carry the same risk of bodily harm, but if you’re not prepared before you jump into the market, it can be murder on your account.
Many new traders can be tricked by the easy entry into the market — really, all you need is a brokerage account, a laptop, and an internet connection. But just because you can get started quickly and easily doesn’t mean you should start making big moves right away.
How to Avoid Common Pitfalls
So how can you avoid losing money in the stock market? Here are some common-sense tips for the often volatile world of trading:
#1 Do Your Homework
No, they won’t be voted the sexiest parts of trading, but detailed technical analysis and fundamental research are vital to longevity in the markets.
If you don’t research a trade before entering a position, you might make gains … or not. It’s a gamble, no more and no less. You can go to a casino and gamble. Or you can do your homework and perform detailed research to make smarter trades.
You have to research every stock you trade — every single trade.
There are two key types of stock research: fundamental research and technical analysis.
Fundamental research is where you research the company offering the stock. You’re looking for potential news catalysts that could affect the stock price and considering things like financial statements or earnings reports to gauge the company’s health.
Technical analysis is where you review the stock’s chart and historical data on the price action. By looking at a stock’s past price movements, you can get a better idea of how it might perform in the future.
By performing both of these types of research, you can narrow down potential trades. And that means you can focus on the most promising ones and forget the rest.
#2 Keep Your Charts Clean
If it’s too complicated, cancel it. That should be your motto when it comes to stock charts.
If there isn’t a clear and easy pattern at play with a stock’s chart, why waste your time trying to decipher something that just isn’t there? Instead, look for clean, easy-to-read charts that follow a clear pattern.
Every trader will have different patterns or setups that they love to follow, like playing morning panics or Bollinger Band patterns, such as W-bottoms or M-tops.
As you build a watchlist of potential stocks to trade, look for the patterns that you understand and that work for you. That’s what you should focus on — don’t try to force trades or look into a chart to try to find something that just might not be there.
#3 Find a Reputable Broker
Remember: Your broker is the gateway between your money and your trades. So who are you trusting with that responsibility?
Don’t just go with the cheapest broker or the first one you find online. Be sure to consider a variety of factors, including available services, account minimums, user reviews, charting software, execution speed, and fees.
For example, one broker might offer rock bottom fees, but they might not offer short-selling as an option. Or another broker might have great reviews but requires a $10K account balance.
Here’s the moral of the story: Take time to research the right broker for your needs before setting up an account!
#4 Find the Right Stock Scanner
A stock scanner is key to trading. A scanner is a platform where you can perform technical analysis on stocks to help you find strong trade contenders and create strong watchlists.
StocksToTrade is a platform created by traders for traders, so you can bet your bottom dollar it includes a bevy of handy charting tools, including a variety of indicators, various charting styles, and Level 2 quotes.
To make things easy on you, the platform even includes links to relevant news sources regarding stocks, including social media sources. This means that you can get a leg up on your fundamental research too!
Best of all, STT now includes trader integration. So you not only have all of the charting software and fundamental research resources you need at your fingertips, but you can also execute trades right from the platform.
5 Ways to Avoid Common Pitfalls in the Stock Market
Now that we’ve covered some of the proactive steps you can take, let’s talk about specific ways to avoid common pitfalls in the stock market. Remember to practice diligence to be a smarter trader!
#1 Buy Low, Sell High
The traditional wisdom in the market is ‘buy low, sell high’ … and with good reason. If you’re taking a long position, you don’t want to buy a stock at its peak price, because it probably has limited room to grow. You have to be intelligent about your entry point for every trade.
On the flip side, if you’re short-selling, the logic is reversed. When you take a short position, you actually want to buy high and sell low. You’re counting on the stock price going down. But the same basic approach holds here, just in reverse: buy high and sell low.
#2 Have a Plan
Always have a plan — a trading plan, that is. A trading plan is your mapped-out course of action for a trade, including your thesis for why it’s a good idea for a trade and the research to back it up. It includes your goals, as well as specific planned-out entry and exit points.
Your trading plan is based on research and helps hold you accountable. For example, without a plan, it can be easy to enter a trade on the fly, impulsively, without a specific plan for where to exit or take profits. In a best-case scenario, you might exit too early and minimize your profits. In the worst-case scenario, you might hold a position for way too long and maximize your losses.
While a trading plan in and of itself is never a guarantee of success, it can make you far more likely to make intelligent decisions in your trades.
#3 Have Stop-Losses in Place
A stop order, aka a stop-loss order, is where you specify that you’ll buy or sell a stock once it reaches a certain price, which is referred to as the stop price. Once the stop price is reached, your order is executed as a market order.
Stop-losses can be great for helping you stick to your plotted out entry and exit points when you can’t be at your computer all day, which is true for many traders who maintain day jobs.
They can also help you stick to your trading plan. When you have a stop-loss in place, you take decision making out of the equation. So your trade will be executed automatically and without giving you the chance to second-guess yourself.
In a volatile market, stop-losses can help minimize your losses, which can be a great way to protect your assets.
#4 Diversify Your Stocks
You’ve heard the saying “don’t put all your eggs in one basket.” That logic’s super relevant to trading.
Let’s say you put all of your money into one sector or industry, and then that sector or industry experiences a massive crash. Suddenly, you can stand to lose just about everything.
On the other hand, if you have a diverse portfolio featuring a variety of securities and stocks in different sectors and at different price points, you have some built-in protection.
There are cycles to the market. When you have a diverse portfolio, it’s natural that some stocks will go up at times while others go down. Having this diversity can help you keep your finances balanced as a whole so that you can better weather storms and stay afloat.
#5 Look at Historical Indicators
History never repeats itself exactly, but it’s often close enough that it bears some merit. So why not take advantage of this phenomenon?
Historical indicators can tell you important details about a stock’s past performance. Often enough, provided price movements aren’t based on a one-off event. A stock can follow a similar trajectory over weeks and months.
So if you’re able to identify a pattern, it can be a good way to help you make an intelligent and educated guess that a stock’s price action may repeat a similar pattern again.
In short, by looking at historical indicators, you can take advantage of the past by making more intelligent decisions about how the stock might perform in the future.
Take Advantage of StocksToTrade Features
The right equipment and tools are vital to success in just about any endeavor. Trading is no different.
You could scan for stocks on one platform, perform technical analysis on another, and seek out fundamental research resources on yet another. But it’s so much easier when you can do it all in one place.
StocksToTrade is like one-stop shopping in terms of stock research. It’s a powerful platform where you can scan for stocks and then apply a variety of technical indicators to help you make the most of the data at hand.
But that’s not all the platform has to offer. There’s also up-to-the-moment news streaming for tickers, so you can get the lowdown on potential catalysts that could move the stock’s price.
Together, all these information sources can help you to create a well-rounded watchlist. When you narrow down your trades from a strong list of choices, you can be better primed to make informed and confident trade decisions.
To a certain extent, every trader will experience losses throughout their career. It’s just part of the game. However, it’s possible to take steps that can help you avoid unnecessary losses.
Don’t be the fool who rushes into trading — educate yourself on trading basics and make a concerted effort to establish good habits. Be persistent and consistent. As Confucius said, “It does not matter how slowly you go as long as you do not stop.”
How do you avoid common pitfalls when trading? Leave a comment below!