Warren Buffet, one of the most revered investors, is widely quoted as saying, “traders should be fearful when other traders are greedy and greedy when they are fearful.” This is an approach that makes a lot of sense for the so-called “whales” in the market but may not be of much help to the small traders out there. Losing in the markets is normal, and greed or fear are just parts of the puzzle.
Have you lost some money in the markets? Forex traders, stock traders, those who trade options and other derivatives tend to make similar mistakes. Here is what you could be doing wrong if you are on a losing streak in the markets.
1. Lack of Knowledge
You probably got into trading without proper education about the markets and how they can be unforgiving. A majority of traders, especially those using online platforms, make frequent rookie mistakes as they put their hard-earned money on the line. Retirees, speculators, and those experimenting with trading are the biggest losers in the market.
Trading in the financial markets is not hard, but turning making profits is a different ballgame. With a connected and democratized internet, there are numerous resources you can use to learn before you start trading.
Make sure you have a firm grip on the specific market you are investing in before you start trading. Sites like Baby pips, FX daily, FX street and Investopedia among many others, have lots of content for beginners. Take advantage of these free and cheap online learning platforms to avoid making rookie mistakes.
2. Are You Hedging?
The majority of new traders do not manage risk or hedge when they start trading. There are several risk management techniques that have been used for decades that you should be using. For instance, those trading in stocks and other assets use options trading to hedge. Hedging is one of the most critical activities in your trading strategy.
Take time to understand how you can use hedging techniques like future currency contracts, futures contracts of interest, forward exchange contracts of interests among others. They might seem a bit daunting at first but these techniques are quite easy to use to your advantage. Forex traders should also make use of stop losses, opposing positions and exit strategies to protect their trading balances when trading.
3. High Expectations & Short- Term Thinking
Let’s say you have a $1000 trading account and want to turn it into $100,000 in a month. These are some of the expectations new traders come with that often lead to spectacular losses in the markets. Though it’s possible to make big wins in the markets, such occurrences are quite rare.
New traders should understand the importance of making small, gradual gains in the markets. Those penny stocks you have been speculating with will not make you an overnight millionaire. As a matter of fact, it’s the long- term investors that normally make profits in the market at the expense of greedy day traders.
4. Inability to Read Market Cycles
Novice or uninformed traders often fall victim to the herd mentality during markets booms and busts. Any sign of a looming bear market drives these investors into a short-selling frenzy even if it means making significant losses. They’d rather have something left than lose their entire trading account.
Market cycles are normal and should be used to make gains. It’s possible to make gains in a bullish or a bearish market. The ability to read, interpret and take advantage of market cycles is a valuable skill in a trader’s arsenal. Even Forex and derivatives traders need to understand these market cycles as they affect the currency pairs or underlying assets they are trading with.
You can make a lot of money in the financial markets if you have the requisite knowledge, know how to manage risk and can keep emotions out of your decisions. “Knowledge is knowing that you know nothing”, Socrates.