4 of the most expensive trading mistakes

As the title suggests I am going to share with you 4 of the most expensive trading mistakes which traders commit very often & ultimately face huge losses in their trading account. All the trades executed can never end in profit, we will have to face small stops while trying to make big money, these small stop losses are not a matter a worry but as a trader if you start loosing  big chunk of your portfolio in small number of trades that is what you should not let happen. Read the 4 points given below carefully if you are committing the same mistakes in your trading than you  need to rectify them immediately.

1. Buying Dips :

Buying a stock or any financial instrument on a dip is the first & foremost  mistake which almost all the amateur traders commit. Professional traders very well understand that we should buy stocks & other instruments where the underlying trend is up & is very strong. There is an old saying in the world of trading ” buy strength & sell weakness”, it means buy something that goes up & sell something that goes down.

The above posted chart is of the stock Lupin, once a downtrend starts its difficult to determine at times how far a stock can fall. The stock did fall by over 52 % in a span of 2.5 years,  why should we allow a negative draw down to incur in our portfolio when we can properly time our exits through technical analysis.

The same stock Lupin in the chart posted above & has performed very well adding positive returns to your portfolio, so the idea is hold on to rising stocks & exit a stock which starts to fall once your  stop level is hit.

2. Not obeying stops :

Amateur traders want to be right all the time they hate facing even small stops, but they do not understand that trading is a business of probability & out of 10 trades  6 or max 7 will only end in profit rest will end in small stops. If a trader cannot accept small stops than he will soon face mother of all losses in his portfolio. Once a stop is hit a trader should exit the losing trade, after all a stop loss is meant to stop the loss from getting bigger, a stop is just a cost of running the trading business. Many traders say that once he keeps stop loss than it get hit first & than the stock moves higher, well keeping stops is also an art you cannot keep stops randomly as per your like, you have to learn it first.

The above chart is of Tata steel , the stock had outperformed in the year 2017 but recently the stock has gone through a correction,  if a trader does not exit at such times than a lot of money he made is taken away by the market itself.

3. Booking profits very early :

As we need to book out losing trades & exit as fast as possible, we should also have the patience to remain in a profitable trade as much as possible. Trading is a business of patience, the more patience you have the more money you make. Risk reward ratio theory clearly shows that our profitable trades should be thrice or more the size of our losing trades, if a trader does exit a losing trader quickly which is a good thing but he is unable to wait in a profitable trade for a longer time than he might not achieve the amount of profitability he desires in his trading account.

The above chart is of the stock Bajaj Finserv, I have marked a green arrow on the chart on that day I had posted a positive view on this stock on my twitter handle expecting that it should rally, if you notice properly after posting the positive view the stock did rally a little bit & than it did tick down & consolidated for almost a month. After the consolidation was over the stock rallied with high momentum by approx 12.40 % in a matter of 1.5 months which is pretty decent profit. But to achieve this profit the trader had to wait for month patiently seeing the stock do nothing & at times even go lower the purchase price, bottom line is if you do not have patience you cannot make money.

4. Averaging losing trades : 

In the first 1 & 2nd paragraphs of this blog I have mentioned 2 different mistakes which a trader commits usually in his trading career, the one  which I am going to mention now is like compounding your mistakes more &  more which will ultimately blow your trading account. As the heading suggests you can understand that its about averaging losing trades. If you have not followed your stops & not exited your losing trade at proper time than exit it immediately & do not add to your losing positions just because the stock is now available at a lower price. Professional traders always add into winning trades & not into losing trades as at times a stock can drop to phenomenal levels before it bottoms out & recovers to your purchase price. As a trader your losing time as well as allowing a bigger draw down to incur in your portfolio.

The above chart is of the stock PNB, imagine if a trader is holding on to losing trade & just watching & doing nothing while the stock he is holding corrects by a wide margin. Is he gaining anything from this behaviour of his? well if he thinks whenever it will bottom out his loss would recover than I  want to say that he is wrong because first of all at times when stocks falls with high volatility the correction happens to be large & if you know technical analysis than you can certainly buy this same stock whenever it starts  a new uptrend after the correction is over. It is absolutely pointless holding on to losing trade.

Final Verdict :

Professional trading is all about knowing the right entry & exit timing without this it is  surely impossible to make money in the market. Secondly personal views about particular stocks has no value because ultimately the stock which goes up is good for your portfolio & the one which goes down is bad. Read the above points carefully & ask yourself are you doing the same & if the answer is yes you surely need to change your trading style & inculcate technical analysis in it.