4 Bad Habits That Stock Traders Should Break

Written byWayne Duggan
Published on13 October 2022

Synopsis:


Successful stock trading isn’t easy, and every active trader goes through slumps now and again. If you’ve run into a losing streak in your stock trading or if you are struggling to generate the positive trading results you’d like, it may be time to reflect on whether or not you’ve fallen into some bad trading habits that are hurting your bottom line. Here are 4 common bad trading habits to avoid.


1. Overtrading


Every active trader is familiar with the phenomenon of overtrading. You see a great bullish opening trade and enter a long position just as the stock begins to tank. After a 0.5% loss, you’re stopped out of your position. Frustrated, you watch as the stock proceeds to bounce and begins to rise above your previous buy price. You re-enter the long position just to see it once again drop to new lows for the day. You close out your second long position at a loss and enter a short position right as the stock bounces a second time. Within minutes of the open, you’ve just closed out your third losing trade.


Sometimes the best cure for overtrading is simply taking a break from the market and coming back minutes or hours later with a fresh start. But many times, overtrading is a sign that you are attempting to react to the market emotionally rather than setting and sticking to a set plan or strategy.


2. Being Impatient


In an ideal world, a winning stock trade pays off quickly. But just because a trade doesn’t work right out of the gate doesn’t mean your initial idea was wrong. If your thesis hasn’t changed but your trade doesn’t seem to be working, make sure you are giving your trades enough time to play out. Of course, if it becomes clear that your initial thesis has broken down, don’t stick with a clearly broken trade.


3. Trading Out of Fear of Missing Out (FOMO)


Just because a stock is making the biggest market move or has the most buzz on social media that day doesn’t mean it makes for a good trading opportunity. In fact, stocks that are big movers and traders on any given day tend to be extremely volatile and unpredictable, often making them difficult to trade. If you look up and see other traders bragging about a stock they bought that is up 50% that day, give their post a like and stick to your own strategy. There’s no shame in staying on the sidelines on a big winner, especially after it’s already made a huge move. FOMO is real, and it shouldn't dictate your stock trading strategy.


4. Taking On Too Much Risk


Taking on too much risk is often a trap traders fall into when they’ve been on a losing streak. When you’re down big and on a 5-trade losing streak, it can be tempting to make 1 big risky trade to recoup all your losses. This type of trading habit is actually a version of the gambler’s fallacy, the belief that you are “due” for a winning trade.


If you are consistently generating poor returns in your trading, it may also be that you are taking on too much risk relative to the gains you are cashing out on winning trades. If you are closing out losing trades at a 5% loss and closing out winning trades at just a 1% gain, the problem may not be with your trading ideas. Instead it may be with your risk-reward balance.


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