The 5 most common mistakes when investing in stocks

With the recent fall in the markets When investing in stocks and cryptocurrencies, it would be wise to use Dollar Cost Average to add some discounted assets to our portfolios. But we may also be tempted to try our hand at short-term trading, hoping to make money faster with market volatility. And if so, we show you five common mistakes that you are going to want to avoid when making your investment in stocks.

1. Repeat too often our investment in stocks​​

Constant price variations can tempt us to do «daytrading«, that is, entering and exiting an investment in shares on the same day. But daytrading is a losing battle for most investors for different reasons:

1. It's a full time job: Since we are trading based on how prices move each day, we must watch and analyze price charts almost all the time. So unless we plan to quit our day job and turn investing into a full-time job, don't bother trying it.
2. Commission payments on most platforms every time we trade: Those commissions can add up big time. So, if we frequently invest in stocks, we will need more profits to compensate for those commissions.
3. The real battle is against the market bots: As investors trying to speculate on short-term price changes, we are mostly competing with trading bots (i.e. algorithms) that can make snap decisions much faster than we can. And they don't get tired or fatigued either.

A more sustainable (and profitable) option is to not make our stock investment every day and instead wait for the right opportunity to come along. Then, when we do, we hold our stock investment for a few days or weeks. For example, we could participate in an upward movement in the stock or cryptocurrency investment markets that lasts a few days, and generate profits along the way.

2. Position our investment in shares without a stop loss

We probably wouldn't drive a car without a seat belt, so let's not jump into investing in stocks without using a stop loss. This simple risk management tool will automatically take us out of a trade if the price moves against us, at the level we set. We must ensure that we set our stop loss at the correct distance from our entry price. If we position it too close to our entry, we run the risk of closing the trade too soon. Too far also puts us at risk of significant loss.

Having a good understanding of technical analysis can help us set a stop loss below key price support levels (for a long trade) or above key resistance levels (for a short trade). But as we will see in the next point, it can also be based on the loss that we are willing to accept for a failed operation.

3. Overleverage our investment in stocks ⚖️​

In Mark Douglas' famous book, "Trading in the Zone«, describes business losses as business expenses: just as a restaurant owner pays rent and staff, an investor must accept losses as an operating cost. Even the best investors have losing streaks, where they accumulate a few losses before finally returning to their winning ways. Of course, large losses can wipe us out much faster than small ones, so we must be careful when investing in stocks with large positions.

For example, if we set our stop loss at 1% away from our entry price, and our stock investment size is $1.000, we will lose $10 (minus trading fees) if it is triggered. Similarly, if we set our stop loss at 2% of our entry price and halve the size of our stock investment to $500, we will lose only $10 on a bad trade. The chart below shows why it is important to keep losses small by taking smaller positions. There are four investors, ranging from the most conservative (Investor A, in green) to the most risky (Investor D, in red). The graph shows what would happen to each investor's $10.000 account balance if they had 10 losses in a row. Trader A, with a 1% stop loss, could easily trade another day, even after 10 consecutive losses. But investor D, who risked 10% of capital with each trade, would have already lost more than 50% of his stock investment.

4. Make an investment in stocks without planning it in advance ​️​

Investing in stocks based on a gut feeling can work from time to time. But this usually ends badly. So let's take our time to plan our stock investment in advance, using key technical levels to decide when to enter, exit and where to place our stop loss. Planning ahead helps us think about our stock investment clearly and without emotion. In that state, we will make better decisions than we would when the market moves suddenly. For example, we can analyze a one-day price chart and detect a key buy level. But the next day, when the price reaches the key level, we may not enter the market if our emotions take control.

Whether you make an investment in stocks or cryptocurrencies, most brokers allow us to set our entry orders in advance using “limit orders.” Not only that, but we can also set our stop-loss and take profit orders in advance.

5. Being in too many operations at once.勞​

Diversification works wonders for long-term investing, which should be the bread and butter of any portfolio. But when we are trading in parallel, watching too many price charts at once can cause problems. By limiting the number of assets on our watchlist to, say, 10 investments, we will have a better handle on the price action of those assets. Of those, we may find one or two assets worth taking advantage of.

Let's remember that, with trading (unlike investing in long-term stocks) we are managing risk with a stop loss. So there is no need to be in many operations at once.