Top 10 Mistakes that Traders Make (Part 2)

5. Not hedging the market

While stock prices do move up in the long-term, this movement is not consistent.  The market is riddled with peaks and valleys.  Maintaining only long positions during dips will drastically slow down your compounding gains.  It is wise to hold put options on a few overvalued stocks and exercise them during market corrections.

4. Holding stocks for too long

No one is a fortuneteller.  The position you just entered is not guaranteed to shoot to the moon.  Actually, it is likely to fluctuate up and down over many months.  Holding a stock in hopes for a large gain is a waste of compounded gains.  Sell your stock on a small upswing and buy another one in a dip.

3. Putting all their money into one stock

Traders who fear the market are those who have put most of their money in a single stock.  There is no perfect stock or buy-in opportunity; thinking so will only result in irrational decisions when the stock dips down.  A company with the cleanest complexion can be hideous when the makeup is removed. 

2. Not using fundamentals

The stock market is a representation of the age-old barter-and-trade system.  You have something that another person wants, and that person has something you want.  As long as someone else wants what you have, you're able to profit.  However if that demand diminishes you will be stuck holding a worthless product.  The best way to ensure that your product will always be in demand is to invest on tangible principles: a company's assets, cash, or earnings.  The worst way to ensure your product will be in demand?  Investing on speculation, technical indicators, or rumors… any of these can disappear within a second's notice.

1. Doing too much analysis

The more work one has put into a project, the more confident they are in its validity.  Stock traders create all sorts of complex analyses, back test it until it works, then convince themselves that they have found the magic formula. 

Stock trading is not complex; it is a simple barter-and-trade system.  In this type of system the person who succeeds is the person that is able to make consistently rational decisions; earning small gains on a large volume of trades.

There are many trading platforms that advertise their complex stock analysis tools, all decked out with colorful charts, gauges, and numbers that give the appearance of wise investing.  The opposite is true, however.  Relying on these flavor-of-the-month tools pulls the trader away from relying on what matters: using basic business concepts to profit off emotional traders.

That's all that matters.  Stick with that concept and you will profit from those who cannot.