Common Trading Mistakes in Equities

Over long time horizon, the stock market is a guaranteed way to make money. It's so easy. All you have to do is buy good stocks and hold them. Everybody advice this, pundits, brokers, financial advisors, the media, the historical record itself. No one who simply bought and held the blue chip like Reliance Industries has ever lost money over a 20-year time span. Right? Yes, right. Now go find me someone who bought and held for 20-years. You should be able to find a few, about 20% to be precise. The other 80% lose money. It happens because no matter how much determined people think they are about buying and holding, they usually fall into the same old emotional pattern of buying high and selling low. Investors are human beings and naturally want to be in the winning camp, and to avoid pain. When things are most euphoric in the investment world, at the top of a long bull market, these people are in there buying. And when things are most painful, at the end of bear market, they are in there selling. In fact, it's usually the final capitulation of the last remaining "holders" that sets up the end of the bear market and the start of a new bull market. Fear is a stronger emotion than greed. Most bear markets last for months or even years and one can feel the torture of losing money week after week, month after month. It would wear down even the most determined buy and holder. But the average investor's pain threshold is a lot lower than that. The research shows that It doesn't matter if the bear market lasts less than 3 months or less than 3 days. People will still sell usually at the very bottom, and always at a loss. The only way to avoid it is to avoid owning stocks during bear markets. People lose money in other ways also even during the strongest of bull markets. Let's discuss some of the more common trading mistakes to which people are prone. 1.Letting small losses turn into large losses. It's probably because the investor gives little attention to risk management. 2. Refusing to take a loss at all. People are reluctant to sell as loser for a variety of reasons; to some it's an inability to admit they've made a mistake. This is false pride. 3.Over betting. This occurs due to faulty money management. Diversification of capital should be done in different assets. 4.Catching falling knives. Don't define bottoms by your imagination it may fall further beyond your imagination. It's always better to let the stock find its bottom on it's own. Just because a stock has crashed doesn't mean it can't go down further. 5.Averaging down. Please don't do it, it’s sure way to make you over bet on the stock. -- Shorting bulls and buying bears. 6.Confusing the company with its stock. Some stocks have excellent trading characteristics while others don't. It could be a matter of liquidity, or a day trading clientele, or whatever. Don’t think a good company will always have a good stock. Mediocre companies may have great stocks.