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The year 2021 was rewarding for many investors. The liquidity unleashed by central banks across the globe in 2020 made the coming year a comfortable place for investors to make nearly effortless money.
Click a few buttons on your cell phone, and voila – the gains were yours for the taking!
But that party seems to be coming to an end right now. The market has seen huge volatility this year. And as things stand currently, there’s more bad news in the store.
It’s times like these when it pays to know what are some of the mistakes an investor should avoid at all costs. Because any bad news can mean a freefall in the market and also lead to huge losses in your portfolio.
Here are some of the biggest mistakes that lead to many investors – especially beginners – giving up their bull market gains in the subsequent bear market…and how you should avoid them.
#1 – Overanalyzing the Market and Not Taking Trades
As per Tad Devan, Senior Currency Strategist at Market Traders Institute (MTI), one of the biggest mistakes investors are making right now is “overanalyzing the market looking for any sign to get in or stay out.”
Doing your research on the markets is one thing you should practice. However, that should not turn into overanalyzing things and getting too overwhelmed to take any action.
As James Bishop, Senior Forex Analyst at MTI, points out… “The number one mistake traders are making right now is having the fear that they are going to be wrong causing them to not take trades.”
This approach can prove detrimental for your trading success in the current environment as any major news can lead to a major drawdown for the markets. And if you’re not quick to act, you can miss the bus or even witness losses for your portfolio.
The best course of action to avoid this trap is to find a strategy that you trust and stick with it.
Let us discuss more about that in the next point…
#2 – Not Having a Trading Strategy
Another big mistake traders are making now is trading without any plan or strategy. It’s because any major movement in the market could also affect one’s portfolio. And not knowing how to navigate through it could wipe out a major chunk of one’s wealth.
We at MTI are huge believers of having a sound trading process and sticking to it.
Having a well-tested strategy in highly volatile conditions helps you clarify your market outlook and how you are placing yourself as a trader to get the most out of it.
This means having clarity on…
- The current market direction
- Your trading process in a particular market environment
- The assets or investments you will be focusing on in this market
- The buying and selling rules
- How you will be allocating your capital across various assets
- And how will you rebalance your portfolio with changing market conditions
Once this is done, all you need to do is stick to the investing process and not get carried away by the market greed or euphoria.
#3 – Ignoring Risk Management and Adjusting Stop Loss Levels
The fragility of markets in response to the recent events has made it critical to protect one’s downside.
However, the mistake most investors are making is focusing solely on capturing gains and ignoring risk management.
Come to think of it, a lot of less time is devoted to risk management and how to exit positions – two of the most crucial factors that determine returns – as compared to finding the next big winner. And that mistake could be a big downer for your portfolio’s performance.
One should instead consider factors like the risk-reward ratio, stop loss levels, the industry scenario, mentor guidance, and the market direction in order to have a solid risk management system in place.
You must also not keep tinkering with their stop loss levels as that could prove detrimental to overall portfolio performance. As Tad puts it, “Adjusting the stop loss order to avoid getting stopped out but also increasing their drawdown is akin to digging a deeper hole in hope to eventually get out.”
Instead, have a disciplined approach to exit your losers when they hit their stops.
After all, the strategy of letting the winners run and having a framework to minimize downside is the closest to having your cake and eating it too!
So, there you go with some of the most common mistakes that traders should be mindful of and try avoiding at all costs. They stand true for all market conditions and more so during periods of high movements in the market.
As things stand currently, we can’t discard the possibility of an even deep correction that may put the U.S. in a recession and make things uglier.
So, pay heed to the market direction, have a strategy to trade it, take care of your downside, and act at the right time.
As James suggests, “The best way to trade this market is to use systems and strategies you trust, and something that seeks to protect your profit and help you cut losses as well.”
If you are looking for a way to navigate the current market environment, register for one of MTI’s free weekly webinars, where our experts will teach you live-market forex strategies that have stood the test of time.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before getting involved in foreign exchange you should carefully consider your personal venture objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial deposit and therefore you should not place funds that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The information contained in this web page does not constitute financial advice or a solicitation to buy or sell any Forex contract or securities of any type. MTI will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from use of or reliance on such information.