Share Market Trading has today become a means of livelihood for many individuals. However, it's not easy as it may seem, though trading is increasingly becoming more scientific with so many tools at an investors disposal.
1) Allowing Greed to Get the Better of You
Sometimes we may have made money but failed to take profits off the table, while waiting to make more money. Suddenly, we realise that the adverse price behaviour has resulted in all the profits being wiped out and you entering into losses.
Let's take an example. Say you buy 1250 shares of PNB (1 lot in futures market) for Rs 170 and the price goes to Rs 175. Now you can sell and make a profit of Rs 6250.
Instead, you wait for it to become Rs 180, but it falls to Rs 165. Now, in place of making a profit of Rs 6250, you make a loss of Rs 6250.
It's best to therefore take profits and avoid greed.
2) Letting Losses Increase
It's best to avoid losses by putting a stop loss. Now, in the above example if you made a loss of Rs 2000 the position would automatically be squared off.
But, if you had not put a stop loss the shares of PNB could crash further and you could end up losing even more money.
This is another mistake that investors make. Let's say that you buy 1250 shares of PNB at Rs 170, the price dips to Rs 168 and you buy another 1250 shares.
The stock now dips to Rs 165. While you earlier had just 1250 shares and could have borne the loss you now have added another 1250 shares on the hopes of recovering money, but the stock crashes further.
Now you are making losses on 2500 shares and not on 1250 shares that you originally bought.
You wanted to average and kept buying at lower levels, resulting in the losses mounting.
4) Not Planning in Advance
A trader must plan before he enters a stock. You have to track a stock that is definitely showing a certain trend.
You have to fix the amount of profit you want to make and the amount of losses that you are willing to bear. You need to also track a stock and have some technical understanding of markets.
5) Buying and Selling Ahead of Events
This is a highly risky trade to get into. For example, you take position in the futures market ahead of results or a key event.
For example, you take position in the State Bank of India stock ahead of its results or the Monetary Policy, which can be risky. It's best to chase stocks when the markets are less event based.
6) Over Leveraged Position
What this means is that you enter into positions way ahead of your capabilities. You keep adding money to recover past losses. This would be more like gambling. The mantra is to book losses and avoid over leveraging.
7) Follow the Crowd
Do not buy on the basis of market rumors. This can be highly dangerous if the rumors are found to be untrue. It's best to buy after a more detailed technical study of the markets.
8) Buying into Stocks, Commodities and Currency At the Same Time
You cannot track all markets at the same time. If you are a trader, buying into stocks, its best to stay away from gold, crude oil or currency markets. You cannot keep track of all the markets at the same time.