Online trading, be it in the commodity market, the forex market, or the stock exchange, can be a profitable venture. However, losses can erode your profits and nullify your gains in no time if you are not careful while trading online.
So if you are not an expert yourself, you should probably take help from a broker who knows precisely how the market operates. An experienced broker will help you avoid mistakes, and thus you will register good gains year after year. So if you are new to online trading and want to avoid beginners’ mistakes, you can look for professional help in online trading.
Some Common Mistakes That Can Cost You A Lot In Online Trading
Not Diversifying Assets
Diversifying your portfolio is the basic rule to lower risks and maximize gains. So if you are not diversifying your assets, you are committing a grave mistake that can erode your gains when the market is in a volatile state.
Investing In The Wrong Assets
It is needless to say that if you do not know what to put your money on, you stand to lose money in the market. Whatever it is that you are investing in, be it bullion, stocks of a company, or any other commodity derivative, if you do not know the worth and potential of your asset, you cannot go a long way.
Now understanding the growth potential of any asset can be tricky. If a particular asset is not performing well in the past three or four quarters, it does not mean that the trend will continue for a long time. So if you want to know the growth potential of any asset, you need to keep some things in mind.
Points to keep in mind to choose the right asset for yourself
- Firstly you should take into account the time period for which you wish to hold the asset. There are some assets that have high volatility in the short term, but they are always beneficial in the long term. So if you are looking for long-term investment, you should probably go for those assets that always give a net positive output in the long term despite short-term volatility.
- If you would not want to lock your money in a particular asset for a long time, you should look for the short-term growth potential of the asset. So if you are looking at commodity derivatives, see if that particular commodity will be in short supply (great demand) in the near future or not.
There are many factors that determine the future potential of a commodity derivative. For instance, if you buy derivatives based on grains, you must factor in the Ukraine War, as Ukraine is one of the largest wheat suppliers. So the war is likely to continue for a long time. Wheat may be in short supply and great demand.
Not Rebalancing Your Assets On Time
Rebalancing means maintaining the weight of a certain kind of asset in your investment portfolio. Usually, the kinds of assets that you hold and the weight in which you hold those assets depend on your end goal.
Now whatever your end goal, you have to continuously rebalance your portfolio so that your investments match your financial goals.
So, for instance, you may hold bonds and stock in a one-to-one ratio or fifty percent bond and stock. Now with time, due to the way the market performs, the weight of the bonds may become sixty percent. Now to reset the ratio to the original value, you may have to sell some bonds.
So if you forget to rebalance your holding at the appropriate time, the portfolio may not give you optimum results when the trends change in the next few quarters.
Not Paying Adequate Attention To The Risk Thresholds
As an investor, you can have the desired risk appetite. You may wish to invest aggressively so that you can earn the maximum amount of money from your stocks, or you may just want to invest enough in maintaining a steady income.
Now each investor has a risk threshold. The upper limit of the threshold is the maximum risk that he is willing to take. So if you are someone who does not want to take any risks at all, you should probably stick to those assets that are government-backed. Treasury bills and government bonds usually have a sovereign guarantee and have almost zero risk associated with them.
However, if your risk tolerance does not match the kind of stocks that you are holding, then you may be in for a rude shock. Most people are not well educated about the risk associated with each kind of asset. And in some cases, even if they are aware, they may choose to ignore their prior knowledge and be swayed by promises of huge gains.
Blinding Imitating What Others Are Doing In The Market
Many new online traders think that the pie charts and bar graphs that show them market trends are the most accurate guide to investment. However, as long as you do not have the aptitude to understand the true meaning and implication of market analysis, you should not blindly follow market trends.
There are many reasons why the markets may show a certain trend. Malpractices like insider trading or market rumors affect stock-related indices. So you should either take help from an expert before you carry on a transaction. Alternatively, you should yourself gain knowledge about what the analysis depicts before you invest your hard-earned money.
Online trading is a boon for many. It is convenient and cheaper than offline trading. You also have greater control over where your money is invested. The transactions are faster, and you can quickly sell off a stock that shows signs of volatility. However, if you do not diversify, balance risks, or if you blindly imitate the trends, you will not prosper whether you are trading online or offline.