If you’re new to trading, it’s important to familiarise yourself with common pitfalls. This way, you can understand the potential consequences of your actions and will be more inclined to apply best practices.
Overtrading
Whilst it may be tempting to be overly active when trading, some people take things too far. Overtrading is where you buy and sell stocks excessively – often without a plan in place. The consequences include high transaction costs and a reduction in the quality of trades. Not to mention the increased risk of losses.
If you find yourself buying and selling without a clear rationale, or increasing the number of trades you make after a loss (otherwise known as ‘revenge trading’), these could be signs of overtrading. To become a successful trader, you need to be patient and use more thoughtful tactics.
Ignoring risk management
Protect your capital by integrating risk management within your tactics. Otherwise, you could experience greater losses.
Here are some examples of tactics you could use:
- Position sizing: This involves adjusting your trade size based on volatility and uncertainty.
- Having a diverse portfolio: By spreading investments across different sectors, asset classes and regions, you can reduce the negative impacts of any one market.
- Stop-loss orders: These allow you to automatically sell a position if it reaches a predetermined price.
Not adapting to market conditions
While having a strategy is important, so too is the ability to adapt. If your plan is too rigid, you risk not being able to adjust to changing market conditions. This could lead to adverse results.
Having a diverse portfolio can help you stay flexible as a trader and can be used as a form of risk management. Hedging positions and using multiple strategies for different conditions can help too, from trend-following to mean-reversion. With this comes a need for continuous learning, so you can refine your approach over time and stay adaptable.
Overlooking fundamental analysis
It’s crucial to understand the broader market context when engaging in commodity trading. For this reason, you should look beyond technical indicators and at the wider picture to understand what influences it.
This involves considering factors that influence share prices:
- Supply and demand: The amount available and the appetite of buyers can dictate certain markets.
- Geopolitical events: Anything from political to military updates can cause share prices to fluctuate.
- Economic indicators: Activity across economies of varying scales can play a role in share prices.
By staying up to date with the latest news from reputable sources, you can focus on particular areas that will inform your strategy.
Emotional trading
Staying level-headed is important. Emotions can cause you to make rash decisions that could compromise your position. These range from fear to euphoria depending on how the market is performing.
When you experience the thrill of making a profitable trade, this can distort your perception of what the future holds. Equally, fear caused by volatility can lead to you feeling preoccupied by something that isn’t as impactful as it may seem. Premature sell-offs and opening overly optimistic positions that aren’t part of the plan can hinder your prospects or cause you to make riskier decisions.
Ultimately, your emotions can create bias and lead you down a particular path without a clear strategy. If you keep your feelings under control, this can help you make more logical decisions. Create a robust plan and stick to it.
