8 BIGGEST AMATEUR MISTAKES
2. Insufficient Practice
Amateurs never practice share trading. If you did any paper trading, you probably had 1-3 loss-making trades which you glossed over and ignored. Then you started to trade with money and made more losses - and you're still holding those loss-making shares today - years later. Now start paper trading again and buy 10-40 stocks in one day. Watch how they perform after a month. Get used to making losses and start experimenting with different types of stoploss and exit rules. Losses are normal. Stop cheating, gain experience, hold a post-mortem after every trade and adapt your investment strategy and duty of care system. Continue practicing whilst you trade and you’ll become a much better trader - especially when you’ve clocked up over 200 trades. Also you’ll speed up your decision making a 100 times.
3. No trading plan
A trading plan sets out future actions you’ll take if the share price rises or falls to certain price levels, or remains flat for a long period of time. A trading plan will help you to become disciplined, focused and decisive and is the key to high profits – even in a slump. A trading plan has 5 components – shortlisting, buying, holding, selling and post-mortem. All your life, you’ve been brainwashed by the financial services industry with the well-known phrase "Shares - They will recover." So you have held under-performing shares for 3-10 years or more. You suffer low profits from indecisiveness and procrastination because of the lack of a trading plan.
4. Trusting “experts” without proof
This mistake is understandable. After all, you assume that the expert fund manager knows what he’s doing. However most fat cat funds fail to beat the index and their average return is only 5% - not much more than 3% avg. savings rate. Their risk-reward ratio is poor when you’re losing 50-90% in a crash. Perhaps you started to learn about technical and fundamental analysis to pick shares, which sound so scientific and reliable. Wrong! The question to ask is “Why are there over 400 technical analysis indicators and so many “expert” methods? The bottom line is none of them work very well – especially in a crash! How can you tell if an expert is reliable? The answer is “Does he publish successful real time trades in a slump as proof his method works?” You’ll see they only publish “cherry-picked” testimonials which are undated because they were written in the 2000 market boom. – none are written in a slump. That’s why, we publish successful real time trades in a slump - see our “Proven Results.”
5. Wrong objective. Win rate before profit.
Your goal is to make high profits every year - not to make a profit on every trade. You’ve been brainwashed to “Hold for the long term.” in order to forget about selling and to regard a loss as a mistake. So you go to great lengths to avoid losses and all the accompanying bad psychological trauma. You place a heavy emphasis on achieving a high win rate. You try and force all your trades to make a profit because “They might go up soon.” Wrong! Share trading is a probability game with only a 70-80% win rate for an expert. So share losses are inevitable. To make “winners” pay for “losers.” You have to control and manage the losers. Make “profit” your primary objective. Learn to limit losses with a sophisticated stop loss policy and protect your portfolio with a duty of care system.
6. No short list. No deal flow. No compound growth.
You finally sold a share. Well done! Now it’s time to buy another. However you take a long time before you buy it. You lack a shortlist of shares to buy. So you have no deal flow and no compound growth. Where do you find shares? There are over 4000 stocks on the London market and 20,000 in America. Make a shortlist from your paper trades. It’s the short cut to buying shares quickly – as soon as you’ve sold one - buy another. You’ll see how deal flow – even a small profit rate of 3-6% - soon builds into 20-80% pa profit by the magic of compound growth. My target is 80% profit from 12 trades averaging 6% each.
7. No holding strategy. A daily chart is worth a thousand words - like a picture
A holding strategy involves a daily check on your portfolio and shortlist. You spend 5 mins a day brushing your teeth for oral protection. Similarly, you need to spend 5 mins a day safeguarding your portfolio to “Protect the cash.” Remember - shares are a form of cash - bought and sold in seconds using an online stockbroker. Every day look at a price chart of your shares and set up your trades using your stockbroker’s automated buy and sell limits. Thus you avoid having to watch a screen all day long to action your price targets. Also look for recent company announcements, dividends, press releases and financial updates. Ignore analyst and stock broker ratings – they’re biased and subject to conflicts of interest. News like BP’s gulf rig explosion, a take-over or a sharp price swing may influence you to change your price targets and stops quickly.
8. No stock market training.
You’ve never had any stock market training. Yet you wouldn’t play golf without having some golf lessons first. There’s a lot of trading jargon, financial instruments, psychological stuff to learn. Also you need to get the right tools for the job and know what works and what doesn’t. You need an investment strategy, trading plan and a duty of care system. You need to know how share prices move in order to forecast them. Your first job is to turnaround your failing portfolio and start to generate cash flow - even in a slump. Preparation is key.
Physically it is very easy to trade shares. Just a few clicks to buy and a few clicks to sell. Mentally it’s tough. Losses are tougher but so is getting a good win rate.
1. Incomplete Investment Strategy
Amateur investors lack a comprehensive investment strategy which can make a profit in all market conditions. Most trading strategies are only successful during boom periods but you need to handle stock market crashes, long economic depressions, neutral/flat periods, fast and slow markets, small/large cap stocks, penny shares, commodities, foreign exchange, spreadbets, ETFs etc. Consequently amateurs always have loss making portfolios and you tell yourself “You’re holding your shares for the long-term.” Also you lack a recovery strategy to turn around a loss making portfolio to start generating cash flow again.
