Learning how to trade the capital markets online can be a daunting task. Whether you are a novice or expert trader, we all face situations that are difficult to handle. When markets are volatile, the price action can make you second guess yourself. The key is to remain steady and stick to your trading plan regardless of the situation. Here are some common mistakes that traders make in online trading.
Pigs Get Slaughtered
There is an old Wall Street saying that describes greed. “Bulls make money, bears make money, pigs get slaughtered” warns investors against excessive greed. The terms bull and bears refer to those who are long or short the market, while the term pig refers to a trader that becomes greedy. We all fall prey to greed at some point. A trade moves your way and instead of taking profit per your trading strategy, you decide you want to ride the trade to glory. Getting greedy without proper risk management is one of the worst mistakes you can make. If the security you own starts moving against you, it can easily turn to a loss or even worst wipe you out.
Got a Hunch Get a Bunch
When you are trading online, it’s important to understand that you get paid to take risk. The more risk you take the larger the reward. Another mistake that is often made is assuming you do not have to take risk to generate a reward. This is true if you are purchasing government bills or bank CDs, but if you are trading riskier securities, the reward you receive is predicated on the risk that you take.
Traders who want to generate substantial gains, but do not understand the risk they need to take are subject to taking a loss to quickly. They enter a trade hoping for a windfall gain and exit immediately once they realize that they are losing money.
The key to a successful trading strategy is to have a trading plan that you stick with even if the market is going against you. You need to realize that when you trade online, you need to set specific risk parameters, to receive the reward you are looking to garner.
You Forget to Set Stop Losses
A key mistake that many traders make is forgetting to set stop losses when they are trading online. A stop loss is an execution order than will terminate your position if the security you are trading moves against you. If you are trading and you do not plan to watch the markets consistently, you need to place a stop loss with your broker to make sure your losses are capped. This issue can become even more important if you are using a margin account and leverage on your trades. Markets can also be extremely volatile when economic news or financial news is released that can affect the value of the securities you are trading.
Learning how to trade the capital markets online will provide you with opportunities to make mistakes. Whether you are a novice or expert trader, we all face situations that are difficult to handle. When markets are volatile, the price action can make you second guess yourself. You need to make sure you don’t get greedy, stick to your trading plan and place stop losses in the market if you will not be watching how the market reacts consistently.