The Online Investing AI Blog

As the financial markets continue to crumble, people are looking for a better way to invest. Buy and hold investors, as well as mutual fund and index fund owners have lost half of their portfolios. After losing that much money, many people are looking for other solutions.

Thanks to the Internet, trading stocks has come to the masses. Many online stock brokerages have grown and flourished, such as E*TRADE and TD Ameritrade. But notice that these companies make money when you buy and sell stock, regardless of whether you win or lose. They’re not called the E*Profit or TD Ameriprofit. If these online brokerages lost as much money as their clients do, they would surely disappear.

Here are the top reasons that new traders lose money in the markets:

1. They are Totally Uneducated
   Many people think they can just start buying and selling stocks and make money in the process. I know because I was one of them! However, nothing could be further from the truth. Buying and selling stocks is one of the most difficult ways of making money. It requires serious study and learning from successful traders. This learning can take the form of books, CDs, seminars, or even online training.
    
2. They Let Fear Limit Profits
   When a novice trader buys a stock and it starts to make money, they will be very happy. Now that their emotions have distorted their judgment, they are completely screwed. As soon as the stock starts to falter, they are faced with the realization that their profit has declined. This will cause an emotional reaction and they will typically quickly sell. They allow fear of reduced profit to limit their upside.
    
3. They Let Greed Consume Them
   As soon as a stock start going up, everybody wants to buy. This causes the stock to go up even further. The inexperienced investor sees how far the stock has gone up, and concludes that it will continue to go up. This is exactly what happened during the tech bubble of 2000. Many companies that had zero intrinsic value started going higher and higher. Greed spread throughout the world and people chased the stocks as they soared to new heights. Thousands of new investors (and many experienced ones) thought that they would continue to up. This is how easy it is for greed to cloud our better judgment.
    
4. Their Ego Takes Over
   This typically happens when an inexperienced trader starts to lose money on a stock. They say, “Well, it’s only gone down a little bit, but I am sure it will go up.” The stock continues to go down. Now they say, “I’m sure it’s going to come back.” By the time it’s gone down 40% or 50%, they know they’re screwed. Now they lament, “Hopefully it’ll come back!” The root of this behavior pattern is the desire to be right. Even though the market has told them clearly that they were wrong to buy the stock, they insist that they are right, and hold on to a losing position.
    
5. Risk Management and Position Sizing
   Most new traders arbitrarily choose position size based on how they feel. If they’re a good mood, they might take a large position. If they’re not feeling confident in the moment, they might take a small position. Sometimes they’re sure about a stock, and they bet their whole account on one trade. These are all great strategies to lose money. Successful traders do not let their mood determine their position size, and have a very specific system they use to determine the number of shares for each trade.
    
6. Not Having Written Trading Rules
   Most successful traders keep very clear written rules that determine when they open a position, when they close it, and when they stay on the sidelines. Human beings are dominated by emotions, so it’s nearly impossible to make trading decisions without our feelings getting involved. Regardless of how hard we try, it’s pretty much impossible to make a decision using only cold, hard facts. Written trading rules make it much easier to follow the system without letting emotions get involved.
    
7. Not Having a Specific Goal
   As with anything in life, it’s important to know exactly what the outcome of our trading is going to be. Many people say, “I just want more money.” Unfortunately, this does not work well with trading. A specific, measurable financial goal makes it much easier to succeed in the markets. It could be a certain amount of money, or a certain percentage return on the account.

Although this is not a comprehensive list of the mistakes new traders make, I sincerely hope it gives you an idea of some of the common errors. The point of this post is not to discourage people from trading. Trading the markets is a great way to make money, and it does require specific skill learning. Anyone can become a successful trader, if they learn how to do it properly.

Related posts:

1. A Volatile Economy is Great for Traders
2. The Top Reasons Traders Lose Money
3. What is the Difference Between an Investor and a Trader?
4. Do Automated Trading Systems have to be Perfect?
5. Why use an Automated Trading System?

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