7 trading traps in the Financial Markets
There exist many trading traps that can trip traders and make them lose.
While engaging in the Financial Markets can be very exciting and lucrative, without guidance, a proper plan and a proper frame of mind, a person can lose a fortune. The trading traps present therein are very dangerous, but can be avoided most of the times. Therefore, even though operating is challenging, it’s in Tradeo’s best interest that its clients profit as much as they can and keep trading with us.
While nobody is entirely safe from these pitfalls, learning to spot them can save one from a lot of pain in the future. These trading traps are the most common, erroneous ideas that people acquire about the financial markets. Thought they might be crystal clear even to experienced traders, people often forget them often. Yet, as a person matures, these a person is less likely to fall for trading traps.
Remember to review this guide at least once every two weeks in order to protect yourself from forgetting them.
Without further delay, here the 7 most common trading traps:
1. Market stampede
Often the market will go up and a lot of opportunities to earn will be available. This can happen either due to a newsflash or any other event but be careful not to be swept along the current, because it’s impossible to know when the bonanza period will finish. Beginners can often make the mistake of not keeping an exit strategy for those moments, and may keep an asset for prolonged periods of time after the rush is over. This might even cause them to sustain heavy losses in the end. “Don’t be married to your asset”, is a very famous quote that reminds us not to fall for this these kinds of trading traps.
2. Not setting take profit point and stop loss
If an asset a person holds is going up in value, he/she could be seduced to hold on to it for a much longer time than originally intended. A person may fall in these trading traps when the asset reaches a higher value than expected (when no take profit is set). After all, who can say when it’ll reach top profit? But that’s where the peril is: to think that an asset will only go up. To matters worse, products often go down considerably after a high climb. The novice trader will hold on to the product and lose a lot by thinking it will turn around. Top traders are known for always keeping modest, short term profits in sight. These profits amass into a fortune in the long run.
3. Diluting losses by buying more shares
While these trading traps resembles the previous one there’s a different side to it. The main advice here is: Although an asset you have might be losing value, don’t think it will suddenly spring back up. Keep your eyes on your plan unless there’s compelling reason not to do so. And most important: don’t ever add money to a losing position just to dilute your losses as it might take a long time until the value goes up again. Often, it may not even go back to its former value. The result is not only money lost, but time as well. Sell it soon as you think you know you’ve missed the mark (or put Stop Loss), and trade a more promising asset.
4. Winning excitement
Keeping their cool whether they profit or not is probably one of the most important traits of professional traders. Winning money is surely very nice, however, a person who lets his emotions run wild when that happens won’t enjoy his victory for long. Often, these individuals might think they are enlightened (or with some special intuitive power), run ever bigger risks and lose a lot in the short or long run. It’s important to celebrate even small profits, but never let that get the best of you because it’s impossible to win all the time.
5. Being impulsive
In the Financial Markets, intuition counts a lot. However, that doesn’t mean a person’s decision should be based on it. Rather, it’s always more important to stick to the fundamentals. Be wary when the market is going straight in one direction but in a suspicious manner and never rely only on an unfounded rumor or guru who claims he can see the future. Many traders’ downfall can come from following the heart more than the brain. This is the most common of the trading traps.
6. Going against the tide
It’s not rare that lot of people will be on the wrong side of the market. This is true particularly when a war happens somewhere or a company files for bankruptcy. Nevertheless, don’t go against the market unless the causative fact is clearly known in your mind. Nowadays, millions of investors are trading around the world, all of them with the same goal of earning money. Unless you have tacit proof they are doing something wrong, don’t think you can beat them all. Remember: there’s a lot of wisdom in the crowd and this is one of the reasons why Tradeo has created the market sentiment chart to track traders’ opinions.
7. Rumors and uninformed analyses
This is one of the most elusive of the trading traps. As it just so happens, traders can never know everything there is because there are many unknown elements in the market. Unfortunately, that also goes for renowned sites and top traders. They too are often wrong. Therefore, for every operation you make, it’s wise to consult with more than one source in order to refine your plan. It’s not uncommon for elite trader’s predictions to be completely wrong, so don’t put all your trust in only one of them. Always look for from another angle. This is why diversifying the portfolio is one of the most important moves a person can do, always.
As always, there will be many other trading traps to be on the lookout for. Remember when you fall in one of them: trading demands patience and persistence. Even professional traders make mistakes and lose a lot. Yet, the more a person trades, the more experience he earns. Tradeo suggests traders be patient and calm at all times. Practice makes it perfect so be careful, plan accordingly and safe trading!