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Friday, June 21, 2024

The 7 Deadly Sins Of Stock Trading

To be a successful stock trader there are things that you absolutely, positively must not do. This is a basic guide to the 7 deadly sins of stock trading.

1. Do not trade with money that you cannot afford to lose

This should go without saying, but unfortunately many beginning traders falsely believe that they can immediately profit from stock trading without any training. At this point some people will trade out of desperation, trying to make a living in an arena they know nothing about. Trading out of desperation with money you can’t afford to lose is a recipe for disaster.

2. Do not trade without a trading plan

This is similar to taking a trip without a map. Even if you know your goal is to be a successful trader, how can you possibly get there without a plan? No matter what you do you will end up somewhere, however, without a plan it will most likely not be where you want.

3. Do not trade without adequate trading capital

I understand that it is tempting to want to trade stocks by starting small and having your account grow larger. It is more prudent to have a buffer for those time when things don’t go as planned (and trust me, in trading you will have those days). Having adequate working capital will help increase your chances of staying in the game and profiting in the long term.

4. Do not let your emotions get in your way

This is one of the most difficult things to explain to beginning traders.¬† If you have just been casually watching the markets and have not yet traded with real money you haven’t experienced emotions in your trading. When your money is on the line the game changes dramatically. Money is a very emotional topic. In trading, it is easy to want to change your rules when you find yourself¬† in a losing trade or a series of losing trades. At that point you are actually in the process of changing the rules that caused you to enter the trade in the first place.

I am not saying that you can’t have emotions in trading, I’m simply saying that you must control them to be successful.

5. Do not forget to control your risk

In the beginning it is easy to to feel so certain about buying or selling a certain stock that you might feel tempted to “shoot the works” on one particular trade. This is not what successful stock traders do. They control their profit potential by controlling their risk. Rather than risk 100% of their working capital on a particular trade they will risk a much smaller amount, perhaps in the 1%-3% range. This way if the trade turns out to be a loser they can still come back to fight another day.

6. Do not have unreasonable expectations

The stock trading landscape is littered with ads for trading systems with simply ridiculous returns. Don’t believe the hype. You don’t need to make 1000% return per month to get wealthy in the stock market over time.

7. Do not throw good money after bad

Do not add to a losing position. Often time traders will try to salvage a losing trade by adding to the position in hopes to average things out and hopefully breakeven. What they are doing is basically breaking their own trading rules. Don’t fall in love with a losing trade so much that you try to save it. There will be plenty of opportunities to profit in the future.

The stock market simply doesn’t reward those who are not prepared to profit. No matter how many advertisements of stock trading “magic pills” or “holy grails” you see nothing takes the place of the combination of preparation and determination.