There are 6 mistakes that all traders in the stock market make. These mistakes can cost amateurs and experienced traders alike to lose all of their money. That is why I have put together a list of do's and do not's that can help you to make good decisions with your stock accounts.
What not to do.
1. Do not buy what the news media tells you to. Too many people will buy stocks based on what they heard on CNN last night. This type of investing is risky. You should always decide for yourself with stock is the best pick.
2. Do not buy what a friend tells you is the next "hot pick". This can be even more dangerous than relying on the news to make your investment decisions.
3. Do not overtrade. This is a mistake many professional traders will make. They will have developed a system that turned their $20,000 into $100,000 in 1 year. Then the market changes. They continue to trade their same way and lose it all in the next 2 months. When money isn't easy to make in the markets don't trade because you'll probably lose what you have now.
4. Do not risk too much on one trade. As a rule of thumb you should not risk more than 2-5% of your portfolio in any one trade. Also don't risk any more than 10% of your account in option trades. Risking any more than this can be dangerous to your financial future.
5. Do not bottom fish. This goes for top picking too. I'm sure many bottom fishers lost a lot of money buying Enron stock.
6. Do not stay in a losing trade. This is something I have seen a lot. Someone will buy a stock at $56 and stay with it even as it goes lower. First to $45, then to $35 and then $20. If you are in a stock that goes against you get out.
What to do
1. Do develop your own system. No one cares about your money more than you do. Creating your own trading system is the best way to go about investing your money.
2. Do paper trade before risking any of your own real money. If you can't make money on paper, chances are you won't make money when you put real money in the stock market either. Best to figure it out on paper.
3. Do remember to always use proper risk management. Remember never risk more then 2-5% of your portfolio in any 1 trade. Cutting your loses short is the name of the game.
