Avoid Top 12 Trading Mistakes in Stock Market

trading mistakes

I was recently reading about the trading mistakes people make in stock markets. Whether one is a trader, investor or an employee working for a brokerage firm there are a few pointers one should remember to be successful in markets.

Successful – would even include the ability to thrive or survive without making major trading mistakes. It’s not about making a million, but about being able to sustain yourself and survive so that you are still in the game.

Many people lose money in the markets and never return at all. Some people commit blunders initially and come back with a better plan and mindset in the second innings and do well by learning from their past mistakes.

There are plenty of books on stock markets which talk about errors and trading mistakes people make. I came across an interesting book titled “25 Stupid Mistakes You Don’t Want to Make in the Stock Market” written by David Rye which I had in my shelf.

I would be the last person to comment or review on this book since I have hardly read it. But there were several other articles, books touching upon the dos and don’ts of investing in stock markets. Recently ET Wealth (a supplement of Economic Times) that comes every Monday covered a topic “Is day trading for you”, which is a must read for people who are into trading or investing or both.

A one size fit all approach doesn’t work here because what works for a trader does not work for investors. Let me focus on the investor – particularly the small investor and the common errors that they commit time and again. Some of the trading mistakes could be driven my myths, beliefs or due to panic or reaction to a situation.

1. “This stock is in the news and has been moving up. So I will buy.”

Right Approach: Study the stock, its fundamentals and why is has gone up. Probably, when the good news it out the smart guys have already made enough money on it. However, if the stock or the company’s business is strong you can keep it in your shortlist, keep monitoring and buy it when it turns out of favor.

But this strategy works assuming that the company has a long history and proven track record in different market cycles.

2.”I will apply for the public issue and make quick listing gains or sell after a few months when demand and price shoots up.”

Right Approach: This is a short term bet rather than disciplined investing. This can also erode your capital if the listing price falls below issue price.

Example: NHPC which had an issue price of Rs.36 in the IPO made some listing gains and even touched Rs.40, but after some days on June 13, 2011 the stock was close to Rs.24-25 levels. A few people managed to make listing gains which worked in this case.

Others who waited a few weeks or months expecting better prices lost money.

The reality is IPO is a listing for the first time by a company, which does not have any track record in the market. So it’s not a good idea to invest in IPOs unless you are aware and willing to absorb risks. If one looks at NHPC at current levels it is a good buy at current levels if one has a horizon of 2-3 years and patience on their side.

3. “I will wait for prices to bounce back before booking my losses. Or I will buy some more shares at lower levels and average my cost.”

Right Approach: The first honest advice to you is to book your losses if you find that the fundamentals of the stock are poor. There should be no second thoughts on selling a bad stock.

By doing a quick fix or remedy you are atleast able to save your capital before the market tsunami destroys everything. Booking losses or having a stop loss level is important for investors as well. If you have a loss tolerance of 10%, you should keep your stop loss at this level and implement it.

Assume you bought a stock at Rs.150, given your 10% loss tolerance your stop loss is at Rs.135. If the stock happens to dip to Rs.135 you have to simply sell off your holdings and book your losses.

But in realty people see the stock coming to Rs.135 and bouncing back to Rs.140 and have a hope that it will eventually recover. Remember the simple old saying that “something is better than nothing”. You cannot make gains or profit on every investment or trade you make. So trying to buy more to average is like digging your own grave.

4. “I will square off today if price goes up, else I will hold for few weeks and sell it later (Take intra-day position initially and later hold it for a few days)”

Right Approach: This is an adhoc strategy, where you are not clear about the purpose of the transaction. You are not sure if you want to trade or invest. Even traders have a clear demarcation between intraday trades and positional trades (where they hold for a few days).

One of my friends used to tell me that he knew people used to trade, but when the price is not favorable the trade becomes an investment. What if the prices crash a few weeks later? Worse, you lose your capital. Avoid trading unless you want to become a full time trader by profession.

5. “Trading vs. Investing: Part time trading can fetch me sizable extra income.”

Right Approach: Trading is an absolutely different game. If you get in to it you need to be professional, sincere and dedicated to it. This is not a part time job or activity that anyone can take up.

Of course you can trade part time for a few months before you decide to go full-fledged, but trying to make an earning or quick buck by making a few trades doesn’t work.

Remember, that traders work in front of the terminal for more than 5-6 hours. In addition they monitor US markets during evening or late night hours and also track Asian markets early morning.

This means lot of work requiring full time commitment in terms of attention and resources. The resources in this case can be in terms of a trading system or infrastructure including a PC, broadband connectivity, requisite software, etc.

The other main resource is capital or funds to sustain your trading activity. In addition you also need staff, research assistance, etc. I’m not stopping people from trying this out but hoping to make a sizable income or killing out of this will be a wrong approach.

6. “A stock with a lower price is more attractive than a stock with a higher price.”

Right Approach: This is a flawed assumption. There can be various factors that determine the price so this is not the right approach.

Example: If Stock A is trading at Rs.120 while Stock B is trading at Rs.300, assume that Stock A has a face value of Re.1 and stock B has a face value of Rs.10. Keeping all other factors common, which of these stocks is attractive in terms of price?

Surprisingly Stock B is more attractive because its market price is 30 times the face value against Stock A where market price is 120 times the face value. This is one small example.

There are various other factors such as Earnings per Share, Price Earnings multiple which can help you to make comparison between stocks on a comparable scale and make decisions. In any case make sure you are making apples to apples comparison. Price is relative – for instance if you buy a 500 SF apartment for Rs.10 lakhs and a 1000 SF apartment for Rs.18 lakhs, then obviously the larger apartment is cheaper although the total amount invested is higher.

7. “During recession or crash where one has cash to invest. I will wait for prices to reach the bottom”

Right Approach: No one is good at predicting prices including the investment gurus and stalwarts. So trying to find the bottom may or may not work. Of course Im not recommending you to go out all the way and buy during recession, but there is no harm buying fundamentally strong names in small quantities over time.

This benefits in two ways – first you don’t have to wait for the bottom and lose the opportunity if market does an ‘about turn’ and secondly if prices do drop further you can accumulate further at attractive levels but make sure the stock you chose is a large player with a solid history.

8. “Investing in equities is the best way to create wealth and beat inflation.”

Right Approach: This is true. But if you think that investing in equities is the only route or the best possible route to build wealth and beat inflation, you are wrong. Here, I don’t mind contradicting with experts who have made millions or billions in one asset class. There are billionaires who swear that real estate is the best way to riches, while some billionaires believe in the power of equities, and a few others in information technology and so on.

Try to learn the lessons from them, but remember to use your own intelligence and apply what works best given your own circumstances. Remember that different assets follow different cycles and have different return patterns, so common sense will tell you that diversifying across different assets will help you tide over different economic cycles.

9. “I will invest in my company which I’m familiar with”

Right Approach: This is again as good as putting all eggs in to one or two baskets. Try not to mix your profession and your investing style. The whole point of investing is to create a secondary alternative investment which will generate income and capital appreciation which should be independent of your current job or profession.

Example:  some people try to invest in the company where they work or try to buy more stock or stock options. Since your income and earnings are already dependant on your company and your own performance, don’t put more investment there because if things go wrong you can lose a major chuck of your money.

Avoid investing in your company as it hinders with the diversification of your portfolio.

10. “My cousin Sanjay has made good money on ABC stock. He also recommended it to his friend who doubled his money in a few months.”

Right Approach: This is obviously a good story, but a sure recipe for disaster if you follow cousins, friends, etc. Although it’s a good idea to share knowledge, discuss, etc you need to do your own homework and diligence before deciding whether you want to invest or not.

Probably your cousin or friend have already sold and booked their profits when you were buying it. So be objective and avoid getting carried away by rumors and hearsay.

11. “KKFFCC Brokerage recommends a buy at Rs.220 with a target Rs.250 and stop loss 210. I will buy at this level.”

Right Approach: Most brokerage give buy calls from intraday to weekly calls to even longer calls of up to 6 months. Don’t believe or go by these calls unless you are sure that this fits your investment horizon, style, risk appetite, etc.

12. “Craze for penny stocks. Belief that frequent trading on these can generate income”

Right Approach: Most people have this craze. I have also personally dabbled in these, but the lesson is ‘there is no easy money out there’. Betting on smaller stocks with smaller investment is just like betting on lottery, and returns are not so big either.

If I buy 200 shares of a penny stock say at Rs.12 and sell it at Rs.15 in a month I can make Rs.600 (before brokerage costs). This is hardly a sizable sum and there is always a risk of the stock price falling to the same extent generating equally similar losses. So to make this sizable I try to buy and sell more of these frequently.

So at the end of the month I make profits or losses worth a few hundreds, but the brokerage firm earns its brokerage regularly irrespective of whether I make gains or losses.

Who gains at the end of the day? The broker, so the lesson is to stay away from penny stocks.


Making mistakes is not bad but repeating mistakes often can prove to be too expensive and become unsustainable after a point of time. Try to admit and learn from your trading mistakes instead of trying to justify your actions.

Even the smartest gurus and legends go wrong at times. Probably I may sound like a sage here, but if things go well don’t conclude that “whatever you touch turns in to gold” and try to pick something based on your intuition or gut feel. The stock’s fundamentals should be good to qualify as a good investment otherwise avoid it, so research and analysis is important whether you are a novice or a professional.

A scientific an objective approach is better than going by hearsay or gut feel. Invest in a diversified portfolio spanning different asset classes. This will help you to insulate your portfolio from the extreme volatility in equity markets as well as achieve a balanced mix of risk, returns and investment tenures.


About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

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