I've been there – thinking that you just made the greatest trade ever, only to find out you made a total mistake. It happens, and it makes you feel dumb. Here are some of the dumbest trading mistakes that you can make, so pay attention and avoid feeling stupid later on.
Remember, trading is different than investing. Some of these don't really apply if you're an investor. Keep that in mind as you read these.
1. Always Using Market Orders
Lesson #1 – use limit orders when possible. Market orders can be good if you need to get out of a position immediately. But they can make you feel dumb when you suddenly don't realize the profit you thought you had. Here's my example: I had wanted to sell a stock for a nice $10 per share profit. I put a market order in before work, and when I got home, I opened the trade confirmation… Guess what, my profit was only about $5 per share. What happened? The price fluctuated a bunch during the day and I got very poor pricing. (Remember the things you should do after you place a stock trade).
If I had just used a limit order, I could have been somewhat sure in the price I would have received for selling, and booked much higher profits. Don't get caught off guard – use limit order.
2. Letting Losses Run
Ever felt like you just had a sure thing? I know I have. I had invested in a biotech company that I was sure was going to either be purchased by a large pharmaceutical company or was going to get it's #1 product through Stage 3 Clinical Trials. Well, none of that was panning out after months of holding the stock. Meanwhile, the company was bleeding cash and nothing was changing. I just sat idly by watching the stock price sink about 70% from where I had bought it.
Instead of letting losses run, set goals and develop an investing plan. Put a target amount – say 20%, and if the stock drops below that, sell. Taking the emotion out of it will help you prevent losses from running and avoid this simple trading mistake.
3. Being Greedy
Along the same lines of letting losses run, being greedy is another trading mistake that can leave you feeling dumb. Just think about that stock that went from $50 to $75. That's a nice 50% gain, but you're sure it will continue to rise. Instead of locking in some profits, you just keep on letting it be. But 3 months later, the stock is back down to $55 per share. While a 10% gain is nothing to scoff at, it isn't 50%, and you'll be kicking yourself after that.
This is another area where an investment plan can be very useful. Setting a target where you lock in some of your profits can help you net more, while still playing your “hunch”. If you had 100 shares, and sold 50 of them for a $25 gain, and the remaining 50 for a $10 gain, you net $1,750. However, if you sold all 100 for a $10 gain, you only net $1,000. It can be wise to lock in profits, even if you still have faith in the stock.
4. Buying Hype
Anyone remember Pets.com? This was going to be the company that revolutionized the way we all buy pet products… It even had an awesome Superbowl commercial. There was a ton of hype surrounding this company, and it only lasted a few months before going bankrupt. Just because there is something overall that is revolutionizing the world (at that time it was online orders), you need to make sure that the business still has fundamentals.
A good example today is Snapchat. This is the current Internet darling. The company lets users send photos to each other, which only last for 10 seconds. While there are a lot of potential uses for the underlying software, their user base is in sending scandalous photos. So, would you invest in this company? Well, a venture capital firm (Benchmark) just invested $8 million in Snapchat, valuing it at $50 million. This company has no revenue – just a novel product.
The bottom line is that you shouldn't invest because of hype. You need to do due diligence on any company you invest in, and fully understand how the company makes money, and how you will be rewarded as a shareholder.
5. Blindly Following TV Brokers
Finally, if you watch CNBC, you know that everyday during market hours, all the TV pundits do is make calls on the market. Dozens of calls per hour. Some of the most famous, like Jim Cramer, have their own shows dedicated to them philosophizing on the market and answering caller questions on individual stocks.
But here's the kicker. If you were to follow all of Jim Cramers calls, you would have underperformed the S&P 500 by over 400 basis points on an annualized basis. Only 47% of all his calls over time have outperformed the S&P500. And he's not the only one. There's actually a website called Pundit Tracker where you can see the performance of over 150 pundits and their calls. Not only do they track their performance, they also grade them.
Once again, before making any trade, you should have personally done your homework, and not just bought into a company because a pundit told you to do it. Blindly following a pundit will just leave you feeling dumb when you don't realize the return you expect.
What trading mistakes have you made that left you feeling dumb?