10 Common Trading Mistakes to Watch For

There are thousands of individual stocks for investors to consider. Committing to one stock may be problematic, even if it’s a strong performer. This may limit an investor’s ability to find investing opportunities.

Ultimately, this can lead to an emotional tie to that stock that prohibits investors from leaving. Investors may even reach a point where they think they know a stock better than analysts.

Also , technical analysis is subjective enough that investors may find patterns to justify their conviction in the stock. What one investor sees as a channel, another may see as a downtrend. Someone else might even see that same chart as an uptrend, depending on the period of time they’re considering.

Often, due to making the first mistake, investors might fail to accept a loss, effectively making another mistake. Instead of selling at a loss, an investor could decide to let it ride a bit longer and hope the stock turns around. However, by doing this, a small loss could turn into a significant loss.

It’s important that risk management is considered when making an investment decision. Before purchasing an investment, investors may want to decide where to limit losses and plan an exit strategy accordingly. It may only take one catastrophic loss to wipe out a trading account.

Furthermore, when investors fail to accept a loss, they may even double down on that losing position. They then move from trading for a profit to trading out of a loss to reach a breakeven point.

This might look like buying more shares as the stock price declines, potentially accelerating losses.

It’s important to note that this is typically the opposite of what professional traders do. They typically add to winning positions, where the stock is on the uptrend, rather than losing positions.

A lot of mistakes can be attributed to a lack of education. This is very preventable, and investors should consider prioritizing their own education.

Market conditions, stocks, investment options, and other variables constantly change. Investors may be able to best position themselves by committing time to continuously learning about the markets.

Poor risk management, lack of education, poor preparation, or just market volatility may lead to losses. This understandably may scare investors, causing them to leave the market altogether.

Instead, investors might consider taking a break to regroup, educate themselves, and then start again slowly.

It’s important that investors fully understand how options work, as focusing on price may lead to disappointing returns. A large majority of very cheap options could expire worthless.

Volatility, time value, and current interest rates are just a few variables affecting options premiums.

Paralysis by analysis can lead investors to miss out on opportunities.

Fortunately, there is a straightforward solution: It’s important to remember that sometimes it’s best to keep it simple. The strongest and most robust signals are often the simplest.

Investors might get into a greed phase, seeking the highest possible returns. To circle back to some of the earlier mistakes, it’s important to remove emotion from trading.

Investors may end up disappointed if they look at trading as a way to “get rich quick.” Instead, investors need to have realistic expectations in place — that could help avoid emotions.

Advanced software has made trading easier in recent years. However, it’s important that investors do not see software as a substitute for learning.

Technical analysis can be made easy on most advanced platforms, but it’s still recommended that investors master the basics and not depend on this too heavily.

Finally, investors should also trade with a plan. It’s important that investors are always aware of why they are trading and have an exit plan for both limiting losses and collecting profits.

Furthermore, investors might consider recording successes and failures to learn from both. This could help investors have better direction in the future.

Copyright © 2024 TSX Inc. All rights reserved. Do not copy, distribute, sell, or modify this document without TSX Inc.’s prior written consent. This information is provided for information purposes only. Neither TMX Group Limited nor any of its affiliated companies guarantee the completeness of the information contained in this article, and we are not responsible for any errors or omissions in your use of, or reliance on, the information. This article is not intended to provide legal, accounting, tax, investment, financial, or other advice and should not be relied upon for such advice. The information provided is not an invitation to purchase securities listed on the Toronto Stock Exchange and/or TSX Venture Exchange. TMX, the TMX design, TMX Group, TMX Money, Toronto Stock Exchange, TSX, and TSX Venture Exchange are the trademarks of TSX Inc.

Scotia iTRADE ® (Order-Execution Only) is a division of Scotia Capital Inc. (“SCI”). SCI is regulated by the Canadian Investment Regulatory Organization and is a member of the Canadian Investor Protection Fund. Scotia iTRADE does not provide investment advice or recommendations and investors are responsible for their own investment decisions.

®Registered trademark of The Bank of Nova Scotia, used under license.