Trading in the stock market is undoubtedly an attractive activity for many. Haven’t we all heard stories of people making their fortune in this market? At one point or another, everyone gives some thought to trading stocks, especially when they become aware of the potential of this space. However, it is important to remember that while this market can be quite profitable, it can also result in hefty losses, if you are not careful. Many people have tried their luck in the stock market and had their capital wiped out because they made some mistakes. Expert Shay Benhamou has discussed some of the huge trading mistakes that you should avoid, if you want to profit from the stock market.
What are they? Let’s take a look below:
- Don’t go bottom fishing
Bottom fishing is a common practice in the stock market, which involves trying to catch a stock as it is bottoming out. But, you should remember that you could lose money this way. As long as people are interested in a stock, there will be numerous moments where it seems that the stock may recover. The downward price slide will only end after the momentum crowd will lose interest. The stock stabilizes when value investors’ start taking a nibble, but it could spend a long time in a trading range.
- Avoid trying to time the top
According to Shay Benhamou, there is something in common between tops and bottoms. They rarely happen when they are expected. When investors and traders are feeling exuberant and confident, they continue buying a stock, even after it doesn’t really make fundamental sense. Therefore, it is not a good idea to short a stock that’s trending higher, even if the price is beyond reasonable. Rather than making a guess, it is better for you to wait for some reliable trading signals.
- Don’t go against the dominant trend
You could try trading against the trend dominating in the market, but this will only result in costly mistakes. Unfortunately, it is very easy for traders to misidentify a trend because they are focused on the chart in front of them. You have to consider a variety of factors and not just focus on one element of the market.
- Don’t try to wing it
Sure, some people do make profits in the stock market because of luck. But, experts like Shay Benhamou will tell you that luck will eventually run out. You will get into really big trouble if you try and wing it, hoping luck will turn things in your favor. Some people prefer to follow rumors they have heard about a stock becoming hot and going higher. Even though it comes off as great information, it is not a good enough reason to buy the stock. You should always have a strategy in place, which means that you should plan your trades and then execute them. Be patient and allow your signals to trigger the trades, instead of second guessing yourself.
- Avoid taking trading personally
While a losing trade is not good for your trading account, it doesn’t mean that should let it get to you. Your net worth may fall because of a bad trade, but you shouldn’t allow it to damage your self-esteem. Just because you have made a losing trade doesn’t mean that you are incompetent, any more than a willing trade indicates your expertise or brilliance.
- Don’t get attached
One of the biggest mistakes that Shay Benhamou has identified is when investors don’t consider trading a business. You shouldn’t forget that the stocks you buy are just your inventory and nothing more. It is not wise on your part to get attached to a stock because you have bought it for selling, possibly at a profit, or at a loss if required. Falling in love with your business models is definitely not a smart move and one you should avoid.
- Steer clear of after-hours market orders
If you place a market order at night before going to bed, it will be swept up in a wave of trading when the market opens the next day. This will lead to bad fills. Hence, it is never a good idea to place a market order when you are entering trades after-hours. Rather than doing so, you should make use of a stop order, stop-limit order or a limit order for defining your limits.
- Avoid runaway trends
As per Shay Benhamou, it is better to wait if you have already missed the breakout entry point for a stock that you wanted rather than entering a trend while the position accelerates. It is common for stocks to pullback and the breakout point is also tested. You should wait for this to happen, or for the stock to take a breather after it has moved up its first leg. This would be a better entry point if you are still interested.
- Don’t ignore your stops
It is extremely easy for traders to be able to stop honoring their stops and it can be quite tempting when a trade is going against you. If you start thinking along the lines of giving a position some room for working its way up once more, you will be on the path to a trading debacle. It is best to close the position when the price reaches your stop, unless you believe you are omniscient.
- Avoid diversifying badly
People shouldn’t forget their limitations when they are trading in the stock market. Shay Benhamou states that there are only so many positions one can monitor, and do it properly. While there are too many or too few positions that you can have, you only need so many for risk diversification. There is no perfect number that can be found and it will vary from trader to trader, depending on their risk tolerance as well as their capital.
Avoiding these huge trading mistakes highlighted by Shay Benhamou, can help people in making the most of their stock trading.