Most people think that for them to be successful in stock trading, they just need to determine good fundamentals and know how to read the charts for them to determine the best time for them to invest. However, this is not always the case. There are other things you need to consider to optimize the profit. This article is going to show you some of the common stock trading mistakes that most people do and how you can avoid them.
Common stock trading mistakes and tricks to avoid them
Besides determining good fundamentals and having the ability to predict the best time to invest, there is also something that we refer as managing the trade. Managing the trade will allow you to avoid the stock trading mistakes. Regardless of how under-prized the stock is, or how healthy the fundamentals look, you have to realize the stocks rarely in a logical way. After analyzing the stock thoroughly, you may believe that this is the best opportunity for you to make the purchase but there are very many things that can happen after you have already purchased the stock. The stock may follow the path you have predicted and reap enormous rewards. However, things can also go south and find yourself suffering both emotionally and financially.
Although we mentioned earlier that stock trading requires patience before reaching the goal, there is a lot of things that can go wrong. This is why it is important to diligently manage your stock trading. One thing to realize is that if a stock is fairly priced, it always responds to fundamentals. However, many other factors can influence the direction of a stock, and this can make it move in an illogical way when you compare to its fundamentals. One of these factors is the health of the industry, which is related to the stock. For instance, you can have a stock that has impressive fundamentals and all the indications are showing the stock is growing substantially. However, if for any reason the overall industry is out of favor, this stock has high chances of being caught up in a downtrend.
One of the other biggest mistakes that most traders make is to look at the overall market direction. If the overall market is crashing, the strength of your stock does not really matter. In most cases when the market is affected by a severe downtrend, about eighty-five percent of all related stocks are affected. On the other hand, when there is a strong up trend, only seventy-five percent of the stocks tend to benefit. So, what will happen if there is a wave that goes up big, down big, up big and so on? As indicated the stocks are affected 85 percent on a downwards trend and 75 percent on an upward trend. This means if there is a wave of both up and downs, your stocks are affected more when they go down than when moving upwards. This instability often results to making a loss.
Additionally, the stocks are often subject to news. This could be specifically about your stock, relating to the industry where your stock is in as well as the overall market. All these aspects will affect your specific stock. If the news relating to any of these aspects is good, the stock will go up. However, if the news is bad, the stocks go down.
Let’s have this example for you to understand better. You have selected a stock XYZ because it has great fundamentals and an increasing growth pattern with big growth expectations in the future. Based on your estimates, you think that the stock should be valued around $50. However, since the market has recently had a downtrend and XYZ stock was caught up in this trend, it is now trading at $40. However, now the market seems to stabilize and the economic news is getting better. For this reason, you have decided that this is the best for you to purchase the stock. You then decide to purchase 100 shares at $40 for a total of $4,000. The following week, news comes out that XYZ is being investigated for possible accounting fraud where there was an overstatement in their earnings. If such kind of news came out, the price of the stock is likely to start tumbling. Regardless of whether the news is less extreme, there is also a possibility of hurting your trade.
Even if the investigation found that the news was just rumors and nothing was wrong, allowing the stock to come back at a price, this could take a very long period. In this scenario, you may be forced to go into emotional trading, and this could make you make panic decisions, which will affect you negatively.
How to go about managing your trades
You can avoid these mistakes if you are equipped with a good strategy to manage your trades. With this strategy, you can know what your exit points before making the purchase. By the exit point, we mean you will have the information you need when you know how much profit you want to make and how much you are willing to put on the line. In other words, you do not have to start second-guessing whether your points are a hit or not. Instead, you can watch the trade closely and exit comfortably when either point is a hit. The following example is a good way to illustrate this.
You purchase XYZ at $40 while your analysis states that the stock is worth $50. If you keep your goal at $47 and then put a GTC order, it means that your profit will be $7(17 percent) per share. If the market goes in line with your predictions, this is a good profit to make. You can then decide that you are willing to lose $3 so you can place a GTC at $37. This will allow you to gain much more than you would lose.