Seasoned traders and investors will all agree that there are some things you just shouldn’t do when investing in the markets. And what’s more – the traders or investors who do these certain things end up becoming the statistic – more than 82% of traders close their accounts within 9 months, never to trade again. For long term investors it’s slightly better, although 2008 certainly sent many running for the sidelines.
So here is a list of 10 killer reasons reasons why traders and investors fail. What does it mean for you? Well you can enjoy more success in the market simply by doing the opposite of everything on this list – and you will also know what to look out for and avoid in the future. If you’re ready, here they are!
1: They Don’t Have A Plan. A trading plan is the fundamental place you should start when trading or investing – and yet many people don’t have the time, don’t realize the importance of them, or just couldn’t be bothered.
2: They don’t use Stop Losses. All of the old traders and investors I know who have traded through crashes and recessions swear by one main thing – a place where they absolutely will get out of the market, also known as a stop loss. Make sure you know yours.
3: They haven’t got tested rules for entry and exit. Would you fire a nuclear missile randomly into the air? Of course not! Someone could get hurt! It’s the same with trading – find rules that work, rules that you have tested. Don’t just buy or sell randomly or you will get hurt.
4: They pay too much in brokerage. Brokerage can have a devastating effect on a small account. If you are using a full service broker at around $60 one way, making 50 trades a year will cost you $5,000. This is a big drag on your account, especially when you are trying to use compounding to grow it faster. Larger accounts are not so bad, but it still pays to be aware of this pit fall.
5: They risk too much on one stock or trade. A classic mistake, this involves either not knowing they are risking too much, or being so over-zealous they bet the farm. It can result in some spectacular gains, but over the long term the result is largely the same – bust!
6: They think that investing does not mean hard work. Ah the carefree life of a trader – lying on the beach making casual calls to your broker. What a life! And what a load of marketing rubbish. The truth is, becoming a trader or investor is hard work. You need to research and manage your positions, while not losing your head.
7: They haven’t got their psychology in check. Ok, there are way too many books devoted to psychology in trading. Way too many. But the truth is it does play a part in trading – you have to have the courage to stick to your plan, go against the grain sometimes, and jump back in after a loss. Get your psychology in check.
8: They over-diversify. Most financial planners will advocate diversification. But the truth is if you are over diversified you become at risk of under performing the overall market. The best investors and traders focus on a handful of great stocks or companies. In fact, it has been proven that between 6 and 12 stocks is optimum, and anything over that, your diversification is wasted.
9: They have a plan, but they don’t follow it. So they have done the research, they’ve tested their theories, but when they actually put money in the market they break all of their rules!
10: They mistake a rising market for investment skill. Ah bull markets. How many “gurus” come out of the woodwork as a market is rising? And what happens to most of them when a bear market comes? That’s right, never heard of again. Whatever the conditions, keep learning in the markets. Or as Han Solo from Star Wars puts it: “Great kid! Now don’t get cocky!”.