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Stock Options Investing 6 Common Mistakes Investors and Traders Make, And How You Can Avoid Them

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Whether you have decided to begin Stock Trading or Options Trading, there is a very strong chance you will commit some or all of the common mistakes I’m about to share with you. Successful investing requires confidence and desire, but most importantly, discipline.

Even the most successful traders and investors have more than likely broken their rules at some stage of the game. You may develop a great skill for reading stock charts and have brilliant results in paper trading, but how well you manage your way of thinking, and in turn your money, will dictate your success with stocks and options.

Mistake #1: Not Having an Exit Plan Before Buying

All successful investors/traders have an exit plan before they even enter a position. The reason is simple: You must have a plan and stick to it, otherwise every decision you make will be emotional, not rational.

Even worse, the larger your trading position, the less rational your decision-making will be. By making all your decisions before taking a trade, you are less likely to react with fear. Emotional decisions are generally always poor ones, leading to large losses and small gains.

Mistake #2: Plunging Too Much into a Stock all at Once

By plunging, the investor makes two mistakes, putting themselves in a perfect position for their emotional decision-making to run wild:

1) They purchase entirely too large a position in a single stock.

2) They do it all at once.

Once a huge position has been taken, whether the stock price begins declining or increasing, the emotions of plunging work against the poor investor. If the stock declines, the investor will either get scared and sell out with a loss, or hold on with hopes of the price coming back (which may never happen).

If the stock increases in value, the large dollar gain is often hard to resist, and the result is that the investor cuts their potential winnings short by selling out too soon.

In short, plunging causes you to cut your profits short and let your losses keep mounting…exactly the opposite of what you should be trying to accomplish.

Mistake #3: Failing to Cut Losses

All traders and investors will have stocks show themselves to be losers. Once a stock starts to decline it can become a vicious cycle. The more and longer a stock declines the more it is apt to continue declining, or continue going sideways. For this reason, it is important to exit the position and stop the bleeding once it becomes apparent that you have chosen a loser.

There are several reasons investors do the opposite:

* Novice investors tend to hold on to their losers, hoping that the stock will someday pull itself together.

* Some hold on because they can’t accept that their analysis was wrong. The Market is ALWAYS right.

* Some reason that as long as they don’t sell, then they haven’t really lost anything. This is an error because the value of their stock is the current market price, not what they paid for it.

Mistake #4: Choosing Stocks that are in a Downtrend

Investing in stocks that are in a downward trend is the most common mistake among novice investors. To profit from such a strategy, you need to be right about two things at once..

1) That the stock’s slide will end (a surprising number never do until they become worthless)

2) The timing of when (and at what price) the stock’s slide will end.

Your chances of being right about both things are pretty slim. More often than not, you will get wounded trying to catch a falling knife.

Investors like Warren Buffett have made a fortune buying stocks when the crowd don’t want them by following a strategy of value investing. Follow the link below for more information.

Mistake #5: Adding to a Losing Position

Amateur investors quite commonly add more funds to a losing position. The reasoning behind this sounds something like…”I bought the stock when it was $20. Now it is $10, so it’s twice as good a deal as it was at $20. Besides, my average cost per share will come way down once I add to the position”

This strategy is fool-hardy and very rarely works.

Mistake #6: Falling in love with a stock

It’s a common mistake to have a good run with a stock and then decide that you will never sell it. Some people have a hard time parting with something that has been so good to them, but what your emotions tell you to do and what you should do are two different things. Save the ’till death do us part’ thing for your marriage, not for your stocks. Even billionaire investors like Warren Buffett take profits occasionally.

Discipline and solid money management rules are the keys to success. Be strict with yourself and adhere to your written trading plan. Value Investing

Learn Options Trading Strategies

To your ultimate success

Lorraine James

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