If you’re new to stocks and investing then you should prepare for a wild ride.
There are many different mistakes you can make along your journey, so I’ve put together a list of the four biggest for you to make note of.
Succumbing to the Fear Of Missing Out (FOMO)
FOMO is a problem when it comes to trading as it’s an emotional knee jerk response to what’s happening in the marketplace.
When we trade emotionally, we stop looking at what the charts are telling us and instead attempt to go by gut feeling, which often leads to disaster.
One of the most recent cases of FOMO in recent years was the explosion of Bitcoin in 2017. Prices seemed that they would continue rising forever and a bubble quickly formed.
The more people bought into bitcoin the larger the bubble grew until it finally burst. The collapse left people whipsawed at the top of $18,000 or more, a sharp contrast of today’s figure of just under $4,000.
The point is that people blindly bought into bitcoin knowing little to nothing about the actual product. Bitcoin’s price was pegged to nothing people’s fear, greed, and hysteria.
We might not see a more evident example of FOMO than 2017’s crypto bubble, so it’s worth studying for future trends.
Going against the trend
There’s an old saying on Wall St. that “the trend is your friend.” So if prices are going up, then it would be wise to enter a buy order. This is often easier than going against the momentum of the crowd and short-selling.
Some new investors, however, do not understand this concept. Some believe that because a price is so low that a correction should be in order at any moment. Or they believe they’ve found the bottom and all they need to do is buy and wait for prices to recover.
Both of these lines of reasoning are dangerous because no one knows when the bottom of a market will occur — the same way that no one knows if a price will correct itself to the upside.
What we’re dealing with here are assumptions that are based on wishful thinkingmore than anything.
Although reversals can and do happen the strategy overall should be to assume the price will keep doing what its doing unless proven otherwise.
Not having a risk management strategy
This point is similar to not having a stop loss but it goes a few levels deeper.
Whenever you enter a trade, you should consider how much you’re willing to risk with your position. Having a stop loss sets a hard limit for this but there are other risks to take into consideration.
Another thing you should consider is how likely it is that you will reach your profit target. For example, is the price in a strong uptrend? Then it could be more likely that you’ll hit your numbers.
With these indicators in mind you’ll be better prepared to manage your overall risk profile.
Opening too few or too many positions
Having too many positions open is simply a headache to manage. There’s simply not enough time in the day to keep on top of 15-20 positions unless you are very confident in your assessments.
The opposite is also a problem when people open too few positions. This can a serious issue especially when you’re using your entire bankroll on one trade.
A good number is between 2 and 5 positions at the maximum spread over different assets and securities. These numbers will give you enough potential to work without overwhelming you with choice.