Do you remember your first stock market trade and how you behaved at the time? Just like you, everyone
has made some really stupid mistakes while investing. Today, I would like to share some mistakes (only the big ones) which some of my clients have made during their first trade in stock markets. Its worth discussing,how these could have been avoided. You can learn from them too!
Mistake 1: Buying on Others Recommendation.
Ravi had just got a spanking new trading account and I was so eager to trade and make lots of money. Ravi saw an Orkut community recommending GTC – a “Buy” Recommendation. There were several good reasons discussed there, and an extrapolation on how it can reach from current price of 600 to 2000 in some months. It looked like a “don’t-miss” trade. Ravibought 10 shares @ 560/-.
Mistake : Buying only on recommendation and not analyzing the opportunity well, over relying on others recommendation, buying a company which I do not understand enough .
Learning : Never buy, just on recommendation! Do your own study and analysis. When you buy on others recommendation, you don’t take responsibility if there is any loss, which is dangerous in markets. Hear others but listen to yourself. See other factors like market trends, sector view, global markets, future prospects et al. Once you are fully confident that it’s a good trade and you feel comfortable with it… go for it.
Mistake 2: Being too greedy
Mistake 2: Being too greedy
After 3 days : Just after Ravi bought the shares, it went up from 560 to 800 in 3-4 days. Ravithought that its moving as expected, and bought 10 more shares at 800. Within another week, it went up more to 950! Now, Ravi was flying! He bought 10 more shares @955 again, to reach the target of 1500+ . his average buy price was now 772 . Ravi was feeling little bad for not buying 30 shares directly @560 in the start .
Mistake : Greed! Pure & simple… This is a very common mistake, a big mistake at that – so big that it will be among the top mistakes investor and traders do. Buying more wasn’t wrong. It was the intention behind the buy. There is nothing wrong in increasing the position once it moves to your target, but it has to be backed up with strong reasons and study. It should be a trade with high probability of success. In my case, it was not. It was just a recommendation from someone in an orkut community, with a couple of lines, explaining, why it will go up .
Learning : There was no need to buy more shares that point in time. Ravi should have just sat back and watched. The Stock market is just like our life, you need to have a level of satisfaction in your life and stock markets. If you want more and more and more, you might not get anything. In fact, you can lose heavily. Because of greed, Ravi investSituations change in markets, Ravi never checked on any news regarding the company after he bought the shares, and he was never updated about it. Every time you get some good profit, its a wise idea to at least book some partial profits out of it (Unless you have really strong reasons to hold it for long) .
Mistake 4: Having Ego
In next 1 week : Prices now started coming down. It came to 900 first, Ravi was scared and told himself that he will book profits once it goes back to levels of 950+. It never did! Then it came back to 800 and he regretted not booking a profit at 900 and said to himself again “I will book it for sure when it comes to 850.” Guess what? It never did! Then it went up a bit again and went up to 850 . he forgot the promise to himself & allowed my greed to take over my promise. It went down again after that and now it was near my average buy price. This was the time I was feeling, “What a big fool am I, for not booking Great profits!” I could have sold it at 0% profit, & yet I didn’t, because I would look a fool in my own eyes. Why Stock Markets Attract and Look Easy
Mistake : Ego ! Fear of losing part of profits, another mistake was the fear of not making any profits and fear of losing some money . Fear! Fear! Fear!
Learning : “When your boat starts sinking, you don’t pray… just jump” Once you are doubtful, surrender to markets wish. See what markets are showing you, not what you wanted to see. Markets are supreme and no one can be smarter than the markets. Leave your ego at your home, when you go in front of Markets. The markets tell you what’s going to happen, not vice versa. Accept that you are wrong and you made a mistake. Then move on.
Mistake 5: No Patience
After few days: Then the prices started falling and plummeted to 600 (my original buy price). Now I was in loss. I was proven wrong, but I just couldn’t accept it. I kept trying to prove myself right by holding it and hoping it would come back up. Yea, you know… It never did . It went lower and lower and lower and I was just praying & hoping that it’d return back to a level where I’d be happy to sell it. It never did! It went up to 300 and I sold it all in frustration. Then, I saw it go down to 250 and bounce back to 500! Now, I was feeling like I was cheated by the market for not giving me the right opportunity to exit.
Mistake : Impatience, Fear and not cutting my losses short. I exited at a very bad time, at almost the lowest price then. There was an opportunity for me to exit at small loss, but taking a loss hurts the ego and it did. Not cutting my loss in time was the result, of my not defining my loss early enough. I should have had thought of it earlier. Then, I’d just pull a trigger, when it reached that level, without emotions. Fear overtook common sense, Fear overtook logic .
Learning : I should have defined my Target and Losses before taking the trade. I should have been realistic and logical. I should have waited little more time and then exited at a better price. I should have consulted someone, better than me (At that time though, even a street dog could have given a better advice than me Price of GTC INDIA after this Incident : It never went above my price levels after that and went to Rs 55 after couple of months , even today (Nov , 2010) , its hovering below Rs 65 only .
Conclusion and Summary
My first trade was not at all planned and “no plan” is “a plan to fail” . Fear! Greed! Emotion! Ego! Impatience! . These are the elements of Failure in Stock markets. Manage them well and you’ll do better!
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