Beginners often face a contradiction. Everybody that first enters the stock market perceives it as the most complex finance in the world. Experts tell you most traders don’t earn money, and you can never guarantee results.
But as soon as you take your first position, you find a different story. Maybe you win four times in a row with an improvised strategy. Everything looks straightforward and easy to predict. You could say your win rate is over 50%.
Then, you get confident and face one costly loss.
It happens more often than you think, and it’s all because of misguiding beliefs. Everybody can win. But how do you time when it’s time to buy or sell?
Fearful traders may delay buying or selling too quickly. Overconfident traders will always buy stocks and delay selling. None of these approaches will grow your account.
- 8 Things We Wish Beginner Traders Knew
- #1 Increasing your position size lowers the quality of your decisions
- #2 There’s no guarantee stock will EVER reach the same price
- #3 If A happened after B, the cause could be C
- #4 You can’t see yourself losing money
- #5 Overvaluing pattern recognition
- #6 Misunderstanding win rates
- #7 There’s no such thing as winning or losing
- #8 Not all new stocks have to be winners
- Don’t Make These Trading Mistakes!
- Trading Strategies: Not Losing Is Winning
- Wrapping Up
8 Things We Wish Beginner Traders Knew
You certainly need to know what you’re doing before you start trading. You can read books, watch courses, and train in trading simulators. But direct preparation can only get you so far.
You can have the most accurate strategy to predict prices. The decision to buy or sell often doesn’t depend on predictions, but how you perceive the situation.
Here are eight facts you can only learn from experience:
#1 Increasing your position size lowers the quality of your decisions
The false belief is, when you put a lot of money, you will be more serious and cautious, timing the market better. It’s the opposite.
The moment you start trading, you’ll have dozens of voices in your head, each giving you an opinion of what to do. Although your thoughts are always intended to help you, they rarely do.
Do you sometimes feel like overthinking things? Second-guessing one-self prevents clear thinking, and this effect increases as you invest more money.
Although more money means more reward (and risk), you should only play with the size that makes you comfortable making decisions. Some mental traps include hindsight trading, anchoring, availability heuristic bias, placebo effect, confirmation bias, or bandwagon effect. Here are some examples of thoughts you could have:
- The price goes in your favor right after you sell. “I should have added ten times more money and waited. Why didn’t I see something so evident?”
- The price goes against you right when you buy it. “The patterns obviously indicated that trend.” Then, why didn’t you see them before buying?
- When we convince ourselves that a stock is, say, overvalued, we will find all the reasons to back it up but block/ignore any evidence that proves the contrary.
- If everybody knew a stock is worth $50 tomorrow, it would be worth $50 today. As long as enough people believe, it creates a self-fulfilling prophecy regardless of what’s right.
- When you think too short-term, you may lose the context of the general trend. What the market has been recently doing has nothing to do with the future.
#2 There’s no guarantee stock will EVER reach the same price
It’s funny how many beginners get into trading because of the hope of “exponential returns.” But the moment they start losing money, they look at the market sideways instead.
“Did I lose 20% of my stock value? It will recover eventually.”
We can play with probabilities:
- If a stock stayed in the same range for a long time, it would likely reach it again.
- You have more chances to profit when buying on a downtrend, regardless of the projection.
- Stock prices that plummet rapidly could be just chart spikes.
- Stocks generally grow over the decades.
In the last example, it may as well indicate exponential growth or a crash. It may never get back.
#3 If A happened after B, the cause could be C
We tend to see patterns everywhere that confirm whatever we’ve chosen to believe. But just because two stocks share the same direction, it doesn’t mean one led to the other.
Instead, it means something bigger has set that pattern. Correlated events often happen at the same time and don’t always share the same results.
But aside from pattern recognition, people make this mistake when “diversifying.” They pick different companies to lower their risk, but all of them follow the same trend! Whenever something happens to one stock, all the other fall.
#4 You can’t see yourself losing money
You know you can’t win every single trade, but you can’t imagine yourself losing. What if the setup looks perfect for you, and you don’t know what could go wrong?
This dangerous position makes it harder to accept a change of trend. You might not even have a stop-loss strategy, so whenever prices fall, you hold.
We know you can’t lose if you don’t sell. But if you want to exchange as many times as possible, accepting losses can make you money.
Imagine your stock is going down by 5%, and you have any more funds available. It could keep decreasing, but at the same time, another one could be raising its value. If you waited instead of taking the loss and moving on, you would have lost the next opportunity.
#5 Overvaluing pattern recognition
We don’t know a better way to trade than following a plan. It helps to make decisions clear and increase win rates. On volatile stocks, a decision script helps us stop emotional responses.
That doesn’t mean you can’t fail, however. The markets will move regardless of what you or other people believe, especially long term.
#6 Misunderstanding win rates
At the same time, coincidences don’t mean patterns don’t work. How does it feel if your 90% win rate strategy fails twice in a row? A 50% rate may as well lose seven times (or succeed nine). It doesn’t mean you win every other day.
That’s why thinking of rates as a beginner is dangerous. You may think you will never make money in the stock market, or on the contrary, that you can’t lose.
Experts discourage following any low-rate strategy no matter the success you’ve been having recently. Low win-rate strategies make sense if there’s a better reward, you can tolerate high-risk, and use them occasionally. Ten losses in a row can still make an excellent strategy.
You may have seen ads of “beginners” earning over a million in a few weeks. But you don’t hear of the others who lose the millions just as fast, not even the thousands of traders who never made it.
#7 There’s no such thing as winning or losing
We can say we make “profits” or “losses” to measure our progress every day. But as soon as your strategy changes, these numbers lose their meaning.
Imagine you always go all in. And the more trades you “win,” the more you add to your position. Although this maximizes the progress you can make, risks scale as well. And because great strategies can still fail you (read #6), losses become more frustrating.
If people were able to succeed overnight, they could fail big just as fast. Unless you’ve traded hundreds of times, you should never increase your position size. You don’t have a proven strategy yet.
#8 Not all new stocks have to be winners
Most wish to have bought from famous companies when they were small. But unless they’ve proven some results, you can’t always expect to be right. What about the rest of the stocks that never took off? Most charts indicate a lot of hype at the release date but quickly fall into oblivion.
You may see penny stocks as a low-risk method to get rich since you can invest very little. How do you know they will ever grow? Microcap stops are often illiquid and can offer short term gains, but long term growth may not exist.
Don’t Make These Trading Mistakes!
Experts spend decades trying to come up with the infallible trading technique. It’s much simpler than that.
You don’t need a strategy to win: anybody can do it. The question is, how do you minimize losses when you’re wrong? And how can you flip the situation? Investing success comes from learning how to fail and assess risk.
Rapid decisions are often the best decisions we make, except when it comes to math and psychology. Your brain uses assumptions as shortcuts to think faster and save energy, which isn’t always true.
Don’t get it wrong: intuition can be a determining tool. But use it after you go through your validation checklist.
But what if I miss the opportunity? Look at every big mistake you made in the past. Chances are you were using the rapid system. Whatever problems you currently experience, they may derive from those decisions you made in a hurry. In the market, it takes 100% more to recover from a 50% loss.
If you don’t feel confident, but your script shows a good setup, you should trust the patterns and stay in the market.
#2 Don’t pay too much attention to your thoughts
As mentioned, increased positions will likely increase mental pressure: more chance to have contradictory feelings and thoughts. Given that fast decisions don’t do well in finance, your first thought about anything is likely wrong.
Some people don’t realize they may have that thought by accident, yet they jump into the opportunity immediately. You don’t need to capture all the information.
If something is important enough, it will keep popping up. Let the world tell you what you should be doing. Maybe you see the same pattern again and again, or you lose money because of the same reasons.
#3 Don’t anchor to a price range
Trading uses strategic uncertainty. For a specific situation, the price will move between price A and price B. Depending on what happens next, these limits may change.
How close is the current price from the market ceiling or floor? If it’s stuck at some of these, it may mean it’s trying to break through. If that happens, then where’s the new limit? It could be a few cents away, or perhaps ten dollars higher.
Have a healthy level of confidence while still giving room for uncertainty. Since we overestimate how well our projections will do, underestimate your chances of success to go extra-safe. It will make you more profits too.
#4 Know when to stop buying
Traders have the goal of making as much money as possible. But if that’s your daily objective, you may end up disappointed:
Let’s say you buy for $80 in the morning, and you sell for $100 hours later. You repeat the move and keep making profits, although a bit less every time. Although this way of trading may cost more fees, you can access your money fast to put it on the next opportunity.
Later, you can’t explain why, but you’re losing money due to stupid mistakes. Or you don’t make enough, so you increase your position size: more money on risk.
Decisions take energy, and every decision you make will affect the quality of the next one. After a dozen trades, it becomes harder to recognize the patterns on time.
If you define how much you want to earn per day, you can stop as soon as you hit that mark. What amount is enough to consider your day successful? You can increase it as results become more consistent.
It may either take fifteen minutes or maybe hours. But when you try to always be in the market as a short-term trader, you won’t be prepared for downtrends.
#5 Beware of price forecasts
You wake up one day and find amazing news. “Experts” project stock A, B, and C to surge by 50% this week. You go to the charts and see that there’s indeed a bullish pattern. So you buy it.
But hours later, if not immediately, the price starts falling. It doesn’t recover. Were the experts wrong, or did people anticipate this prediction? It could be both.
Some traders prefer to avoid the first moments of the day because that’s when people start checking the news and changing positions. Forecasts don’t work well unless few people are interested in that stock (low-trading volume).
The stock market may be the only place where prices can move wherever you want if you work hard to make people believe it. Just take a look at these guides about the pump-and-dump and short-and-distort schemes.
#6 Using round numbers to make decisions
If you think about it, there’s no good reason to do it. Choosing numbers like $100, $5, or $23 means less price stability.
Most people will use the same numbers to buy and set limit orders. Experienced traders know that, so they may put the limit 1% farther from that number. The moment the price gets close, it either bounces back immediately or moves back and forth.
Wait instead until the price moves away from these limits. It’s much less likely to stop moving in the middle of the range.
#7 Don’t chase the price
Not all trades can be winners. How do you recover from it? The hard truth may be: accept the loss and move on. But it may feel more convenient to trade again with the losing stock and try to win everything back: sunk cost fallacy.
Revenge trading puts a toll on the long term. It may give you some gains but will lead you right where you started: losing money.
The logic behind it is that you lost because the market did the opposite of what you planned. So if you switch positions fast, you should be right this time.
What if the company is consistently losing money? If you lost too, should you sell and buy again? Maybe, but not one right after the other.
You can’t use any strategies when only looking at the price. Without the context of stock history, you can’t make accurate predictions.
We know some patterns predict the trend by only looking at the price. But unless you test them over and over again, you neither know if they work.
#8 Review your strategy
We create strategies so that we don’t need to spend much time and energy making decisions. When under pressure, you might overlook critical factors. A checklist guarantees you review all the conditions.
There’s no guessing. If these requirements are met, you buy. Otherwise, you sell or wait to buy.
That will only happen 90% of the time, however. You occasionally find what you think to be an excellent or terrible decision, so you question your strategy and ignore it. If you don’t follow your script, then your plan is wrong.
It’s neither about changing it as soon as you find something wrong. A strategy needs enough testing, usually hundreds of times, before you can recognize causality and effectiveness. You will get further by sticking to the same method (make slight changes when needed).
Next, a “new” strategy doesn’t need to be something you’ve never seen or done. Changing a few numbers already considers itself a new method. That’s because the only way to understand causality is to modify one variable at a time.
If you do something bold and new, it may work, but you won’t know why, so it can’t be consistent. Not all strategies work all the time unless you update them.
Contradictory? Only modify your method slightly after gathering enough data.
Trading Strategies: Not Losing Is Winning
None of these work unless you fix the mentioned mistakes. You have to be aware of:
- How probabilities work in the stock market
- How our mind can prevent us from making the right decision
- How prices rely on popular perception short term and real value long term
With those in place, you don’t need to think much about strategy. You’ll probably find the right one and profit because you don’t make the mentioned mistakes. But since it takes time to find out new methods, we’ll share some ideas with you:
#1 Have past performance in mind
The first law of motion says an object in motion will likely stay in motion. The longer it preserves this status, the harder it is to change.
Applied to the stock market, companies will likely keep doing what they’ve always done, especially when having decades worth of history.
We can see a fallacy here: past results can’t always be the future. Because if that were the case, everybody would predict the right price, and their trades would change those prices. But assuming there are no relevant milestones about a company, the price may follow the same pattern.
It reminds us of the correlation fallacy. If something happens to one stock, it will probably happen to the other one, not because of the first, but because of something bigger affecting both. That’s why studying the general market can give a research advantage.
Statistics show the average person buys in the morning and sells at night. Prices go up at the end of the month but fall in the middle. When it comes to highlights, we recognize September as the worst month for trading and April as one of the best.
It may sound arbitrary for a beginner and misleading for a veteran. We suggest taking them as a touch of attention. Let’s say we’re in September. Given that prices tend to go down, if they haven’t already, we would look for evidence to back up the expectation. If there’s none, we may take it as an exception where it could go both ways.
#2 Trade fewer times
If you invest in correlated stocks, sell most of them (if you’re on the green) and keep only one or two. If you trade a single stock multiple times a day, reduce your frequency.
You will not earn much as a beginner when you unique sell a stock every ten minutes (think about fees). As for larger accounts, you only need a few trades to make hundreds within hours.
There’s an invisible factor: decision fatigue. Making decisions consumes cognitive power, which allows us to prioritize. After a dozen trades, you might start having contradictory thoughts and second-guessing yourself.
It doesn’t only limit trading, by the way. Any decisions made in your day will limit the quality of the next one. The solution? Prevention. Make fewer decisions, or cover the most irrelevant upfront.
#3 Never buy when it goes up
Look at the past 15-minute performance. If the stock is going up, do not buy it. Although it feels tempting to lose an opportunity, you may find out it didn’t exist.
A rallying stock shows many people bought already. What do you think your profit chances are when you join at the last minute? At that moment, it may feel like you’re one of the early buyers. But the smart traders were the ones who bought when it was going down.
Although it sounds counterintuitive, you get the best chances when buying a falling stock. It’s not that you buy as soon as it falls, but you consider doing it. When it goes up, don’t even think about it.
Can it get lower? If not, you might want to get in.
A market moving sideways is the second-best time to buy, although it requires some timing and skill.
Now, making a smart decision makes you inevitably lose opportunity sometimes. You might sell on the planned range, but then the stock might grow by 10% in two minutes. Should you buy what you just sold?
Don’t chase the price. If you’re thinking of buying, you shouldn’t have sold. When it comes to risk management, it’s better to sell early than to buy late.
#4 Put your confidence on risk management, not win rates
Win rates mean very little as a beginner. And even if you’ve proven your rates thousands of times, they can still follow weird patterns by coincidence (like ten fails in a row).
That’s why increasing your position because of a good strategy may turn up bad. Instead, minimize your risks always.
That doesn’t mean you make or lose less money, but it makes your gains more consistent. It’s about preparing for the worst while expecting the best.
If you only trade what you can lose, not even the worst strategy can damage your account. At the same time, minimizing risk rejects ineffective methods, even if they helped you make profits recently.
Here’s a practical example: options trading. If you feel confident in a projection, you buy more of that stock. But what if it goes the other way? You can buy options to recover most of the loss.
These are time-limited contracts in which you can buy at an agreed price for an upfront fee.
You buy a $100 stock because you expect it to reach $200. You also buy a put option (call for positive, put for negative projections) at $100. If the stock falls under $100 (say, $50), you can still sell it for $100. For large purchases, the security cost is worth it.
#5 Watch for long enough before you make a decision
If you find a stock costing more than it did yesterday, you may want to get it without much thinking. That might work as a swing or long-term trader, but if you want profits within the next few hours, it will require more context.
What are the market ceiling and floor? Is there more or less volume than usual? Set your objectives: what’s the most and least you’re willing to buy/sell?
Once you have those numbers, adapt your limit order as you check the price. Limit means buying for a set price, while a market order buys or sells at the current rate. You can always buy for more than it costs, buy sell limits will delay until the stock reaches your price.
If you’re in a volatile stock, market orders may trade for a different price than what you saw, which can be dangerous with large sums.
#6 Study new releases
You may have found in the news about some hot stocks outperforming the market. Although they are still small, these companies have started to grow and already have a great reception.
Maybe those stocks aren’t in the biggest exchanges yet. If so, you might want to buy them somewhere else and add a high sell-limit later. Here’s why:
When it first appears in the new exchange, the stock is underbought (nobody knows it’s there yet). After this realization, people start to join until they overbuy.
It usually creates a volume spike in the first week and then fades just as fast. Some stocks may grow back after the initial stage (new people find it every day who may want to buy it).
We can’t predict how far the price will go. If you buy before it’s official in those exchanges, you may want to set a limit 5-10 times the price just in case. If you’re lucky enough to find it when it’s hot (make a price alert), you may profit there as well by shorting the stock.
Unfortunately, you may need insider information to do so as planned. The best way not to miss out is to buy early.
#7 Do your own research for long-term investments
We don’t expect most readers to be active traders. It’s a demanding task, and it’s not for everybody. But when it comes to long-term decisions, anybody can win.
Given that the market has always grown, the biggest mistake you can make is not staying in the market (even if you don’t like the investing world). Will it grow forever? No. What we’re doing is taking the best probabilities for success, no guarantees.
The problem is, again, market perception. If we knew our future, we would change it by just being aware of it. And nothing long term is worthy unless you put enough investment. Should you do your own research or let others tell you what to buy?
Following the crowd doesn’t work because most people don’t think long term in the first place! Yet, everybody knows it’s important.
Study best practices and recommendations from others. But nobody should make investment decisions for you. Lasting financial success rarely comes from decisions made without consideration.
We don’t know a single person who follows all of these rights. You may not be able to apply all the principles at once, but knowing that these exist already makes trading easier.
We hope this guide helped you gain perspective of the game. Remember, just because you’re a beginner, it doesn’t mean you need to act like one.