I’ve experienced some tremendous losses while trading on the stock market. Yet those are my favorite trades of all. These are the ones I cut my teeth on, and these are the trades that ultimately led to me achieving success later. I regularly show my students how I made my mistakes and how to avoid making those same mistakes.
These are the five biggest lessons I learned from my stock market mistakes.
Cut Losses Quickly
It’s never a nice feeling to watch the price of a stock drop. The optimist inside us wants to believe that the price is going to rebound eventually. The problem is this could take years and there’s also a big chance that these losses will never be recovered at all. That’s when people end up bankrupt.
I’ve fallen prey to this more times than I care to mention. These days I have a pretty good handle on cutting losses quickly. Stop losses on your trades are your most important tools.
Stop Using Leverage
No trader should be using leverage or borrowing money to fund their trades. It doesn’t matter how much you believe in your next trade. Nothing is certain in the stock market. One loss could put an end to your trading career and leave you facing financial ruin.
I’ve only ever taken a small amount of leverage, but a few painful losses convinced me never to do it again. If you’re a successful trader you should never need to borrow money anyway.
Stock Prices Don’t Make Sense
I’ve lost count of the number of nights I’ve stared at the screen wondering why a price is a certain way. The fact is that stock market prices sometime aren’t rational, so you’ll need to accept it. Sometimes they’re high or low for no reason at all.
In other words, don’t question why a price is high. The ‘why’ doesn’t really matter because finding the answer doesn’t change a thing. Focus on what you’re going to do next instead of questioning everything.
The Stock Market is Complex
We’d like to think that stocks are simple. Yet studies have consistently shown that stocks that get publicized up on TV often see their prices drop. I used to be a follower of the mainstream media and bought into whatever they were publicizing. Often, it led to losses.
The stock market is a complex beast with hundreds of indicators interacting with each other. When you understand this, you’ll understand why this is such a difficult game and why you must adopt a data-driven strategy.
Don’t Try to Guess the News
It will leave you looking silly. Unless you’re on the company’s board, you don’t know what’s going to happen. This is when people truly start to gamble and it’s when the losses are big.
Stick to the data and react to the fundamentals after the news has been announced. It may mean missing out sometimes, but you’ll also be missing out on those big losses.
Your Turn – Taming the Stock Market
You’ll notice that these mistakes all result from a form of guesswork or gambling. Numbers are the only things that won’t lie to you. Stick to the numbers showing up on your screen and eventually you’ll be profitable.
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