The following article has been contributed by Prashant Sharma
There are several different ways to go about making money through trading. However, there’s one that’s by far more popular that just about any others. That’s known as trend trading. Trend trading is the process of finding stocks in the beginning of a trend and making trades based on that trend for a profit. While this has proven to be a successful way to go about making money in the market, it also has a bit of a learning curve, leading to many mistakes being made by beginners. Here are the top 5 mistakes that beginners make that you should avoid!
Not Believing The Trend
As human beings, we are very rational creatures for the most part. When we see something, we tend to have a pretty good understanding of what the reaction will be. However, in the market, things aren’t quite so rational. Often times, financial assets will rise on bad news and fall on good news. Because this type of movement seems nonsensical, many beginners find trends heading in one direction and make trades based on the news they read that says the asset should be heading in the other direction. By believing rationalization, this move often leads to losses. So, rule #1 in trend trading is don’t think of reasoning, simply believe in the trend!
Overemphasizing Market Correlations
Correlations in the market are incredibly common. For example, when oil climbs, we can expect that stocks associated with oil will follow. These types of correlations are often taken advantage of by trend traders, and for good reason. By finding correlations, you could expand your profits in a big way. However, it’s important not to overemphasize the correlations you find.
For example, if oil is climbing, and you make a trade, it’s a good idea to look at oil-related stocks to see if they’re trending. However, don’t overstep your bounds by making the trade before looking at the chart. At the end of the day, even the strongest correlations can be broken from time to time, and making a trade without verifying the trend on the correlated asset could lead to losses!
Letting A Failure Define Your Next Move
This is an incredibly common mistake among beginners. At the end of the day, we don’t like to fail. However, it’s important to understand that failure is simply part of the game. Making money through trading is essentially making money on predictions. Because we can’t see into the future, it’s impossible for us to be correct 100% of the time when we make these predictions. Sometimes, when beginners realize failures, they continue to push for a recovery of losses, making moves that simply don’t follow their strategies. Don’t let this happen to you. If and when you experience a loss, take it for what it is and move on. Don’t let that loss define you or your moves in the market.
Trend trading is the process of taking advantage of trends in the market for a profit. However, there’s a big difference between taking advantage of a trend and chasing a trend. At the end of the day, sometimes we get to the party late. There’s nothing we can do about that. However, making trades following a trend in hopes of catching it at the right time will generally lead to a loss. Never chase the trend, take advantage of them while the profits are there and know when to move on.
Not Knowing When To Walk Away
As human beings, we are very emotional creatures. However, this emotion should never be involved in our trading process. At the end of the day, emotional trading almost always leads to losses. If you’re having a hard day or are simply overwhelmed by profits. It’s likely best to walk away and call it a day before the emotions start to dictate your trades.
Trend trading can be an overwhelmingly profitable prospect. However, if you decide to get involved, make sure to take a short time to research and learn how it works first. When you do get started, keep the above mistakes in the back of your mind and avoid them at all costs!