3 Mistakes Every NEW Trader Makes When Investing in Penny Stocks

3 Mistakes Every NEW Trader Makes When Investing in Penny Stocks

3 Mistakes Every NEW Trader Makes When Investing in Penny Stocks 1024 546 Steven Dux

Whenever you start something new, mistakes

are bound to happen.

Trading is no different. However, some mistakes are more costly than others. As a new trader, if you can learn how to avoid these most common (and impactful) mistakes, you increase your chances of being part of the 6% of new traders that succeed. 

AND distance yourself from the 94% that fail during their first year!

In today’s article, I’ll share the 3 most common mistakes that most new traders make, and how you can avoid making them (and what life looks like if you do).

Trading is an industry that attracts a lot of new people every year, and for good reason. The chances of making good amounts of money are definitely there.

Penny Stock Trading

The “Right” Way

Done right, trading can prove to be extremely lucrative. And that’s why when beginners enter and start to trade, their expectations are sky-high. Beginners usually enter this industry after looking at the flashy displays of success and money by experienced traders. While that success is on the cards for anyone who does trading well, it certainly can make you commit some grave mistakes. 

As humans, we’re flawed and we are bound to make mistakes. We tend to try and copy someone else’s footsteps instead of treading our own path. What you see on a trader’s Instagram is just the good version of their life. It’s an edited version of it! Most of the time, you won’t see their losses. They won’t showcase their mistakes. And that makes you think it is all easy and trading means easy money. That is far from the truth.

There are many traders who have already made so many mistakes that it’s best to learn from their mistakes.

So before you dive in, make sure you learn from them and be a step ahead. Learning from the mistakes of others is always better because it does not involve YOU losing your own money! Being aware of what not to do is just as important as knowing what to do. In my previous articles, I’ve shared a lot of information on what trading is and what you can do to be successful.

Some useful articles for you include:

There are many traders who have already made so many mistakes that it’s best to learn from their mistakes.

So before you dive in, make sure you learn from them and be a step ahead. Learning from the mistakes of others is always better because it does not involve YOU losing your own money!

Being aware of what not to do is just as important as knowing what to do. In my previous articles, I’ve shared a lot of information on what trading is and what you can do to be successful.

Let’s take a pause and talk

about what not to do. 

I’ve been looking back to 2016 when I had just started my trading career. Excited and eager to make it big, during the first six months I was very confident. I was tracking statistics with assurance as I already had about 30-40 samples. I stuck to a pattern and made about $40,000. While this was happening, I was also indulging my curiosity and looking into different sectors and methods. My mind was a sponge, eager to experience as much I could. But, because I was a beginner, I didn’t have much knowledge about market cap and float.

So I didn’t really have a system or approach in place. You could say I was trading with no strategy!

Yet I still got a few wins and predictably, became overconfident. I started shorting any stock that would spike. And of course, started losing money rapidly. I could have lost my entire portfolio. I would never have made it in trading and would have had to go back to China if I had not taken a step back and analyzed what I was doing wrong!

I had to fix it. I had to make it work! I continued to learn and discover, picking up other peoples’ strategies, analyzing them, testing them on the market, and refining the process until I began to collect some seriously BIG wins!

I learned from these early mistakes, which brings me to the first one that most new traders make…

1.

Overconfidence

Trading is a challenging field, so, in order to succeed, it requires a good measure of confidence. But it can easily go the other way, so the trouble begins when confidence veers towards overconfidence. Being overconfident in trading decisions interferes with good risk management. When beginners first start trading, it is often noticed that they get a few wins fairly quickly. A lot of people call it beginners’ luck. Does it truly exist? No, it is an illusion.

It may seem like beginners get lucky but the reason they get wins early is pretty simple. It’s because in the beginning, most traders will follow what they’ve been told and not take risks. They will not go out of their way to do risky trades. And so they find a pattern and get a few wins, but then because of these early wins, you become overconfident. You start to think you have control over your trades and start taking unmitigated risks.

When you first get started with trading, make sure you don’t take these wins too seriously & don't be overconfident.

It may seem like beginners get lucky but the reason they get wins early is pretty simple. It’s because in the beginning, most traders will follow what they’ve been told and not take risks. They will not go out of their way to do risky trades. And so they find a pattern and get a few wins, but then because of these early wins, you become overconfident. You start to think you have control over your trades and start taking unmitigated risks.

It may seem like beginners get lucky but the reason they get wins early is pretty simple. It’s because in the beginning, most traders will follow what they’ve been told and not take risks. They will not go out of their way to do risky trades. And so they find a pattern and get a few wins, but then because of these early wins, you become overconfident. You start to think you have control over your trades and start taking unmitigated risks.

Being overconfident in trading, especially during your early days, doesn’t even make sense because no matter how many books you have read or how many podcasts you have listened to, unless you have the experience, you are not good at trading. No one is, without going through the grind. Thinking that you know it all so quickly is a common mistake. This is where more than 90% of new traders fail. 

Even one loss here will overwhelm all the wins you’ve had so far. It can wipe out your account. So, it’s in your best interest to avoid slipping into an overconfident mindset. Take the initial wins as a matter of fact, and don’t let them go to your head. Be aware of how you’re reacting to your wins and losses. Don’t let them affect you too much. The road is long and you’ve just started. Remain confident but not overconfident. 

2.

Overtrading

As the name suggests, overtrading means buying and selling stocks too often and too much. Overtrading tends to happen when a trader does not stick to the limits of their strategy. Each individual trader is bound by certain limitations of their financial capabilities for how much risk they can and should take. Going beyond this is considered overtrading and something I would not recommend to anyone–least of all a new trader. It’s vital to find good opportunities and grab them when you can. 

But, playing on opportunities too often can lead to overtrading. It’s pretty difficult to avoid overtrading as it’s human nature to want to achieve more and more. It is also human to become impatient and trade more and more, especially when you’re on a winning streak. I still run into this problem about 4-5 times a year! That’s right, even someone like me who’s been doing this for years and built a $6.5+ million portfolio gets swayed into overtrading from time to time. It’s costly, too.

Whenever I run into overtrading, I end up losing about $40-50k that season.

It’s hard to completely avoid this because we’re not robots. We’re human. We make mistakes. However, with experience and time, I have realized the negative effects of overtrading and am able to manage it better every year. As such, my losses due to overtrading reduce each year. What I’ve realized is that there are only ever a few good opportunities each quarter. For every 200 trading days, only 20-30 trades will be perfect.

That means you can only place one trade every six days. Overtrading can happen even without you noticing. The way to avoid overtrading is to figure out the best trades in a year. Come to a decision on how much you want to risk, but by no means trade using more than what you can afford to lose.In a nutshell, to avoid overtrading, follow your strategy and stick to your plan.

3.

Getting Caught Up

in Market Cycles

Certain trends and patterns emerge in the market during certain situations and environments. Markets are cyclical and they go through phases. Most new traders get caught up in market cycles when stocks are hyped up. Newbies want to trade in such cycles because they’ve seen the potential of the stock. They see the potential but they don’t see the risks and they end up losing money. 

Once you lose, you get filtered out of the market. Back in 2016 when I first started, I too got excited and caught up in certain hyped up cycles. They presented so much opportunity, so why wouldn’t I want to get involved? But here’s the thing… if a stock rises exponentially to crazy levels, that’s not normal.

That’s when you need to take a step back, take a deep breath, and really think about your strategy.

The correct way to trade these stocks is to not trade them at all. Don’t touch hyped up sectors. Don’t trade these stocks until the hype is over. Exercise restraint. That’s the best way to go about your trading here. 90+% of beginners will trade during the hype. Don’t make that mistake. 

Avoid These 3 Mistakes

At All Costs!

To avoid these 3 common mistakes, you must remain self-aware at all times.

Trading is as much about psychology as it is about technique, so stay in touch with how you’re feeling. Keep your emotions under control, don’t let them affect your trading, and be practical as often as you can. Avoid these 3 major trading mistakes and you’ll be on your way to success. Sure, you will make other mistakes, you will fall and pick yourself up again and learn.

All three of these mistakes that we’ve talked about have one thing in common: they are deeply rooted in human psychology. Being overconfident too early, becoming greedy, and falling for hype are extremely natural human behaviors. Therein lies the challenge, to manage these behaviors and become the master of your emotions.

Any trader who has mastery over their emotions has higher chances of success. For a proper shot at being able to do that, stick to your plan.

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