Trading is a jungle. With an overwhelming mass of information, online scammers and make-believe posers, the world of trading can be a difficult place for newbies who don’t know what they’re doing yet. So, to save you from embarrassment, manipulation or even financial disaster, we’ve outlined four common errors beginner traders make so you can avoid them.
1. Launching straight in without preparation
Beginner traders are often guilty of not conducting adequate research or due diligence. Doing homework is crucial in order to gain knowledge of the markets and how they work. Without this understanding, a trade is nothing more than a gamble. For some newbies, the urgency to make a trade may overwhelm the need to properly prepare, but this will probably result in an expensive lesson. So, tip one is to make sure you know all there is to know about placing a trade before you risk your money.
There are many free online resources available on various trading topics. There are even courses you can do if you want a thorough education. There are also innovative tools available that allow you to practice trading before you try the real thing. Take Trade Nation’s trading simulator where you can test trades with no commitment, no financial risk and no sign up needed. Simply follow all the steps and then see how much you would have profited or lost had you made the trade with real money.
2. Allowing FOMO to influence trading decisions
Most of us have experienced FOMO, or fear of missing out, at some point, and traders have to grapple with it all the time. However, sticking to a rational, strategic investment plan is key to consistent trading success.
Acting on FOMO could see you paying way too much for hot stocks that are already on the verge of turning around. Although experts often know when to exit trades when they get too popular, beginners don’t have this experience and are more likely to hang around after all the smart money has made a move. Another example is cryptocurrency — even though it is an extremely volatile asset, the hype around it means that over 100 million people use it around the world. Be wary of popular trades and don’t jump on the bandwagon unless it is in line with your strategy and you’ve done your research.
3. Acting on advice from people who aren’t credible
Lots of traders make this mistake at one point or another in their investing career. Whether you hear relatives or friends talking about a super stock, or see an ‘expert’ on Instagram telling you that you can become a millionaire through forex trading, never bet on blind advice. Remember, if something seems too good to be true, it probably is. You need to have your wits about you — especially when there are so many social media trading scams at the moment.
Always check the credentials of whoever is sharing a tantalising tip and, even if they appear to be genuine, always do your own research before risking your money. A careful and considered approach is the best one.
4. Trading with an unregulated provider
In order to remain on the regulatory body’s lists, brokers are obligated to show evidence of regular audits, submit their accounts on time, and adhere to strict criteria. Unregulated brokers, however, have zero rules to keep them accountable so you should always avoid them.
Put simply, any trader who risks trading with an unregulated broker is rolling the dice with their cash. Unlike with a regulated broker, they are not protected from mistreatment and fraud. Don’t make the same mistake as 24-year-old Jonathan Reuben, who told the BBC’s Money Box radio show that he was scammed out of £17,000 through a foreign exchange trade investment scheme he discovered on Instagram. What’s more, trading with an official broker means you should receive financial compensation if they go out of business, meaning your money is safe in such circumstances. Always look into a broker to make sure they are regulated before placing any funds into an account.