FX.co ★ Typical mistakes of novice investors

When some investors make money in the market, others lose it. Novice investors make the simplest mistakes, thereby enabling others to earn.Our review describes the most typical mistakes of beginners. Bearing them in mind, you will save time and money.

1. Investing in one asset

Beginners often invest the entire deposit in stocks of one company, hoping for high profits in the short term.

Experienced traders believe that putting all the eggs in one basket can lead to losses.

They find it more reasonable to buy stocks of 7-10 companies in order to evenly distribute the risks between assets. In doing so, the long-term potential return grows, since it is impossible to predict which company will turn out to be the most effective.

In addition, you should buy stocks of companies from different countries operating in different economic sectors. This approach will help you reduce macroeconomic risks.

2. Investing more than you can afford to lose

Investment on the stock exchange should be carried out in accordance with the developed investment strategy, which includes estimating potential losses the investor can afford.

Investing is a good way to raise capital. However, you should invest only the amount which if lost will not make you a beggar.

Do not pawn your property, hoping for immediate results.

Start with a small amount for investment and gradually increase it. At the very beginning, traders should not chase high yields. Your first task is to learn how to boost capital on a regular basis. A journey of thousand miles begins with a single step.

3. Trading with leverage

Investing borrowed funds is an extremely bad idea, even for experienced investors.

Investing implies the likelihood of losing money, and in order to cope with loan payments, you must trade high-return assets bearing high risks.

The likelihood of losing leveraged money has a negative psychological impact on an investor, preventing him/her from making the right decisions.

For these reasons, investors trading with borrowed funds do not gain steady profits and regularly suffer from partial or total losses.

4. Giving in to emotions

The stock exchange is not the right place to express emotions. When trading in the market, you need to give priority to the mind rather than emotions.

The rule applies to any speculative trading controlled by analytics and a cool head. The market is volatile. Therefore, opening hasty trades is extremely inefficient, as well as unprofitable in the long term.

Your investment strategy should include clear rules (criteria) for purchasing (selling) certain securities. Specify the time interval for work, as well as the period during which you are planning to keep the deal, so as not to be distracted by minor fluctuations in quotes.

Decision-making on the basis of clear rules will help you avoid irrational actions.

5. Chasing quick yield

Sometimes, the market provides traders with assets which are likely to generate high income in a short period of time.

A reasonable profit margin is usually about 15%, however, some can earn 50% and above. What does this mean? First of all, this means a high risk of losing a significant part of the invested money, and only then a chance to quickly boost capital.

As a rule, the greater the expected profit, the higher the risk. It makes sense to use a tiny part of your investment portfolio for risky assets (5-10%), while the main part should be invested in companies with good financial performance over a significant period of time.

6. Backing out of trading plan

Investing without a detailed strategy and trading plan is like playing a roulette game: you can make a profit from time to time, but eventually incur losses, since the odds are always in favour of the casino.

Your trading plan must establish rules for opening a transaction, the period of keeping it open, as well as the size of potential profit and loss. Besides, the plan should cover a long period of time.

Do not close trades before the deadline and do not move stop loss orders, since this reduces a chance to yield stable profits in the long term. Analysis and assessment of the deal should be conducted only after its execution.