“Why trade shares?” What are the most common mistakes DIY traders make, and quite often fail?
What are the advantages of quality homework research & planning, and seeking professional advice?
At Weybridge Assets we give a simplified unbiased and balanced synopsis of financial trading, and the various alternatives, whether you are on your own or with a mentor that may benefit your goals.
If you want to invest it is good advice to find a reliable stockbroker to buy and sell for you.
Resources such as research and analysis should be at your convenience and at your disposal, and a Broker is far more likely to have information far in advance of the general public.
However frequent a trader you are, share dealing can be a complex area to navigate.
Various Trading Systems: Explained
Day Trading:
A Day Trader, by strict definition, buys stocks each day and sells all shares of those stocks before the close of each day. The day trader does not own any positions at the close of any day.
Swing Trading:
A Swing Trader studies stock prices and identifies cycles or swings in prices. A cycle could span multiple days, weeks or even months. But, a swing trader does not hold stocks for the long term.
Forex Trading:
Forex (short for ‘foreign exchange’) is trading where the commodity is not stocks or shares, but currency. The return for the investor is not in the value of the currency per se, but rather the relative exchange value of one currency against another currency. The trick in the black art that is Forex trading is accurately forecasting the direction of the fluctuation between two currencies. Change is frequently rapid and influenced by world events and a multitude of other factors such as oil prices, interest rates and economic climates.
Futures And Options Trading:
A very general definition of an Option is a legal financial contract. An Option allows the holder the right, but not the obligation to acquire or to sell a predetermined number of stock or futures contracts, in a particular asset, at a fixed price, on or before a specified date, ending with the expiration date. Options can be traded on stocks, stock indices, treasury issues, currency and various other financial instruments.
Futures trading is a standardised, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike Options, Futures convey an obligation to buy.
Long-Term Investing:
A Long Trader creates a portfolio of stocks balancing personal financial goals with asset allocation strategies. Stocks are acquired and held in an account for at least one year. At the end of each year the portfolio performance is reviewed and changes are made to individual stocks within the portfolio.
Professional Stock Investment Advice & The Most Common Trading Mistakes If You Attempt To ‘Do It Yourself’ (DIY)
The best Stock Market advice you will ever read is to learn from mistakes when someone else has made them. The worst mistake that people make is that they believe trading is the easy street toward a way to ‘get rich quickly’. People will often expect to become wizards in the market overnight, but they fail to realise that trading is like any profession; you must ‘learn’ how to do it first.
For example, would you attend a weekend Doctor’s seminar and then expect to conduct heart surgery on following Monday? Of course not! It is shocking what people expect when they go to a weekend trading seminar. They think they will create wealth without having to work, invest or think. It just doesn’t happen that way.
After treating trading like a ‘get rich quick’ scheme, the next most common mistake is to approach the market without a ‘plan’. Without a trading plan, typically ‘do-it-yourself’ (DIY) traders approach the market in an inconsistent manner. For example: One day they trade stocks and the next they trade the foreign exchange. Or, they may use one set of indicators one day, and the next day they will throw these indicators out the window, and take on a completely new set. Without a consistent approach, the only thing governing their trading decisions is really ‘emotions’, and that will doom them to failure!
- Have a pre-defined exit point
When things may not go as planned, and you do not know when to exit, you naturally become paralysed and then rationalise and convince yourself why you should hold onto that stock. As the rough stock continues to fall, you make more and more excuses. Then reluctantly you sell out, and that of course, is the point where to your horror, the stock turns north.
- Increase your position
When you are trading, and showing a profit, do not elect to sell-out your position, cut and run with a smile. The real money will quickly be made instead as right now, this is the point where you should be ‘adding’ to the position, not closing it out. It seems so logical to take the ‘win’, however adding further investment (clearly now at a higher price) to the original position your trading profits will rapidly soar.
In short, trading is not an easy profession, but it can give you great rewards, with the right advice and research. Avoid these common errors, create a simple, well-designed trading system, and learn your market.
If you take the time to study the market and learn from other peoples mistakes (as well as your own), you just may then become a successful trader. When novice ‘DIY’ traders manage to skip these various mistakes, many often nevertheless fall down when they try to go it alone.
- DIY traders: Find a mentor
Thus, all DIY traders should find themselves a coach, or a mentor, or preferably a ‘Broker’. That is someone who can help you spot the errors in your system that you might not have noticed. An outside (impartial and unemotional) 3rd party point of view is guaranteed to help you avoid other costly mistakes, and often therefore greatly increase your profits.
The most expensive mistake to make is to search for the ‘Holy Grail’ of trading. This is an incredible waste of both time and money. Listen to your mentor, or your broker and realise the ‘Holy Grail’ of trading has already been realised. It is simply excellent money management.
- Your best defense against regret: Get a Broker
Most traders will study, and carefully consider any potential trade with technical and fundamental tools, consulting as many sources as possible. Even a simple trade will usually be evaluated in depth, various alternatives will be considered and while doing so, information in offline and online resources will be utilised. Yet, strangely enough, traders are often quite a bit more relaxed when the subject is the ‘broker’.
The assumption is that since these firms are under the watchful eyes of the regulators, brokers need to supply reliable and profitable services to their customers otherwise the authorities will not tolerate their existence.
– Safety
For some, safety is the only consideration in the selection of a broker. The belief is that once one has successfully found a safe, authorised, and regulated broker, the remaining issues are easier to manage and do not pose much of a problem for a committed trader. In fact however, the safety issue is just a tiny part of the selection process for a careful and disciplined trader.
– Security is key
Security is of course the most important requirement from a firm, but if we just decline to trade and lock up our money in some bank vault or a similar storage facility, we’d already be achieving maximum safety. By committing to make use of a broker’s services, investors are not only seeking safety, but are also seeking profits. Furthermore, brokerage services usually have access to, or in-house research, analysis and current information at their fingertips, often far in advance of the general public.
Available Services
Generally, there are an endless range of stockbroker services to choose from based in Finance Hubs all over the world, and depending on your level of investment knowledge, how confident you are with share dealing and how much time you have to spend researching the market, the more involvement your broker has, typically the higher the charges you’ll tend to pay for their service.
1. Execution-only Services:
An execution-only service means that your stockbroker makes trades based on your instructions, and without giving advice. These trades are usually made either by telephone or over the internet. This type of service suits more experienced investors who want to make their own trading decisions.
Although this ‘do it yourself’ trading is the cheapest type of service, remember that investing directly in stocks and shares is one of the riskier ways of investing, and you need to be prepared to lose some or all of what you invest. Some stock-broking firms specialise in execution-only services, and also provide online market information and research tools to help you decide which stocks to trade.
2. Advisory Services:
With advisory services, the stockbroker either advises you about what shares to buy and sell (according to your needs) or looks at your investments as a whole to achieve longer-term goals. The stockbroker will consult you before taking any action and it’s up to you to decide whether to take their advice. You may also be sent market information and stock recommendations to help you make informed decisions.
3. Discretionary Services:
If you opt for a discretionary service, this means that your broker can buy and sell shares on your behalf, based on your requirements, without consulting you each time.
Deals can be done immediately in response to changing market conditions, rather than after your broker has contacted you.
- Good opportunities are less likely to be missed.
- A discretionary service is a good option if you don’t know much about investments and don’t want to devote a lot of time to share dealing.
Involving yourself within the complicated web of financial global and market factors, all integrating with financial harmony or discord, with the cause and effect thereby creating great wealth or crisis means that dealing in shares is indeed complex.
In Conclusion:
DIY trading is often frustrating and can also be addictive, but unlike the casino gambler who bases decisions on gut-feel, a sensible trader seeks positive investments results with little risk. This can be achieved with a little research, due diligence, an understanding of the world’s economies, news and trends.
Is share dealing right for you? Before you begin share dealing, you should consider the following five questions:
- Aside from your mortgage, are you free of debt?
- Do you have life insurance if you have dependents?
- Have you joined your employer’s pension scheme, or do you have your own pension?
- Are you protected through your own or a work income protection policy, if you couldn’t work because of long-term illness?
- Do you have between three and six months savings available to you to set aside?
If you can answer YES to any of the above, then you are in a position where you can consider investing with confidence.
Disclaimer: Share Trading or Trading in derivatives carries a high level of risk, and may not be suitable for all investors. Before deciding to trade you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading, and seek advice from an independent financial advisor if you have any doubts. Unless otherwise noted, all information contained herein is sourced from Weybridge Assets, Inc. internal data. The content included herein has been shared with various in-house departments within the company of Weybridge Assets, Inc., in the ordinary course of completion. Parts of this presentation may be based on information received from sources we consider reliable. We do not represent that all of this information is accurate or complete, however, and it may not be relied upon as such. This document and the financial products and services to which it relates will only be made available to accredited investors of Weybridge Assets, Inc. and no other person should act upon it.