5 Most Common Investing Mistake And How to Avoid Them
Yesterday when I was going through the stock screener I stumbled upon TATA POWER stock. It was one of the first stocks that I bought back in 2020, it gave me a 40% return, impressive right? Not really, because after I sold it, the stock has grown almost 5 folds (500%). This got me thinking about all the mistakes I made during trading.
Throughout these 3 years, I made many mistakes and had to part ways from profits. And after going through the ups & downs of the market, I was able to collect some common mistakes that you should avoid.
Booking profit as soon as you achieve the target.
In 2020, my portfolio had a Compound Monthly Growth Rate (CMGR) of 2.78%. It increased to 5.21% after I stopped booking profits at targets.
Then what should you do? Well, a simple answer is to trail your profits. Trailing your profits can have massive impacts on returns. Because when you book profit on target, you are missing a potential rally or at least a price rise. A safe trailing ratio is 20%; You are willing to risk 20% profit for a potential rally.
Jumping on a rally, after it has already started.
Everyone has done it and we know how tempting it is to jump on a rally. We take the trade thinking that we’ll settle for a small profit and exit the trade, but we hardly do so.
I have learned it the hard way, you should follow your analysis. If your analysis couldn’t tell you about the rally then it's better to not get on it. Otherwise, you’ll end up taking a trade about which you’ll be clueless about what’s going to happen next.
If you miss a rally then the best thing you can do is to find out why you missed it in the first place and improve your analysis.
Not creating a hedge of your position.
To hedge means to take the opposite position of which you currently hold. Let’s say you are positive that Apple is about to rise by 5% in the next week. So you buy Apple shares at the current price and hope to get a 5% return, but what if, the next day the share falls by 2%? So to protect your existing funds you buy an opposite trade — Buying a put option for the weekly expiry of Apple or Selling Apple Futures. This is hedging. If the stock rise, you are in profit. If it falls the opposite trade/hedge will reduce your losses. Hedging will offset the risk of adverse price movement.
As a beginner, my main concern was profit. So I never considered hedging important for me. But protecting the funds you have is more important than making a profit. It helps mitigate market risks and volatility.
Investing without understanding the stock.
Many of my early trades were based on advice from Youtube or other platforms. But as I learned more about trading I was less dependent on other traders’ advice.
Needless to say, I had to take losses in most of the trades that I got from others. Because I would not be confident about the trade. I would take the trade and then keep checking it and even a small drop in price would make me anxious. And I would end up taking a loss or booking a profit very early.
Once I started doing my analysis, things changed a lot. Now, even if the stock dropped I would know when to exit and be calm.
An easy beginner strategy is using a 200 Or 50-Day Moving Average with RSI or Stochastic RSI.
Not respecting Stop-loss.
Ahh, we all have done it at some point in trading. Getting into the trade again after hitting stop-loss. Sometimes it worked, and sometimes we had to take a loss.
I used to do this a lot and most of the time I would make a loss. Stop-loss is the last protector of your funds. Once you hit a stop-loss then it’s better not to enter the trade again.
You can also use trailing stop-loss. Instead of a fixed price, it trails behind the current price by a certain percentage. Trailing stop-loss can be very useful in Intraday trading or Options trading.
If your trades hit stop-loss before taking off to your targets, then you are not accounting for volatility in your strategy. An easy way to fix this is using the ATR indicator, multiplying the ATR by 2, and subtracting it from the current price to determine a reasonable stop-loss level.
Waittt, It’s 9:15 already. You know where I’m headed to….
Keep learning, Keep Growing
#DontGiveUp
This write-up serves informational purposes only. It should not be considered explicit financial or legal advice. Not all information will be accurate. Before making any serious financial decisions, consult a professional.
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