Top 10 Mistakes Novice Traders Make
We are all novices at one time or another. Investors that are starting out tend to make several similar mistakes. Here is a heads up, so that you do not fall into some of the most common investor pitfalls.
- Acting on emotions, mostly fear and greed.
It’s business. That’s right. Your investments are business, and as much as you would like to act on your gut feelings and emotions, it’s important to create investment goals, strive to reach them, and most importantly, know when to get out. Investment decisions should be made based on market facts and information. Being fearful to act or being too greedy will end up hurting the bottom line of your returns.
- Selling “winners” too early; pride seeking.
It all comes back to treating your investments professionally and not like a local gamble. For each trade you should create a reasonable first target goal, and then a second or third target goal to follow after that. These targets should be based on trend data, and on what your return goals are. How much do you want to earn off of the stock? Keep that in mind, and don’t sell the stock until you reach that first goal. Seek higher returns, not pride from your peers.
- Holding “losers” to long; avoiding regret; becoming too familiar with a stock
Just as you shouldn’t sell a winning stock too early, you shouldn’t hold on to a losing stock too long. If you made the wrong choice, the sooner you let it go and put it into the past the sooner both you and your portfolio will recover. There’re going to be some losses in even the best portfolio. It’s just the nature of the stock market. Watching a stock closely can also give the novice investor an uncanny sense of familiarity. Investors start to believe they “know” how it will behave. Nobody can really know for certain how a stock will behave, regardless of how close they follow it. The market is volatile and always changing. It’s better to remain objective when evaluating stocks.
- Overconfidence; underestimating risk
Every stock transaction has some risk associated with it. Always remember that you are putting up capital so that businesses can put forth their best efforts to turn a profit. If things don’t turn out as planned, they won’t be seeing a positive return – and neither will you. This is why it is so important to remain objective and not be overconfident in any venture.
- The perception of patterns, where they don’t exist
Trades in the stock market are incredibly random, so the likelihood of patters existing is very low. Most stock patterns tend to be coincidental, and any patterns that seem to exist are probably not based on any concrete facts or data. Remember to stay objective when observing stocks.
- Biases in judgment
Since stock investment decisions are based on data and company information, it’s important to be aware of the inherent bias that may taint an investor’s judgment. When reading company data, be aware of the source. Companies have investor relations that strive to smooth over the content of their reports, so be aware of that when reading their published materials. It is also possible for investors to be biased on a stock based upon past performance. Sometimes a stock with an excellent track record will have an off season or a poor stock will rise to the occasion. Again, objectivity is the key. Focus on the data and trends, rather than how well or how bad the stock fared with you in the past.
- Trying to time the market
Generally speaking, it is impossible to time the market. Concentrate your efforts on making sound investment decisions and ensuring your portfolio is diversified, rather than timing the market. The market will take care of itself, so you should watch out for yourself by keeping track of your portfolio.
- Trading too frequently
Sometimes holding on to a stock is the best course of action. Remember to trade only at the opportune moment, not before or after. Stick to your targets and exit strategies, but don’t go looking for other reasons to trade. Overconfidence usually leads to trading more than necessary.
- Errors in judging probability
When starting out, it’s common for novice investors to make errors in judging the probability of a stock. Take extra care when making your estimates, and if an error is made, go back and find out where the mistake occurred. Learning from your previous miscalculations will enable you to get it right the next time.
- Trading on news/events; misinterpreting information
When listening to news or announcements, remember the bias mistake, and pay attention to how the information is being delivered. Remaining critical of the news is important. Ask yourself, “Is this news really credible?” and “Will this news really affect a stock’s true value?” Remember that other people may act on the latest sound bite, but that doesn’t mean you have to. Only tangible, quantitative information will really have an effect on the value of a stock.