Let us see the following example to understand the basic and most commonly made mistake by a stock market trader:
- You buy 1000 shares of stock A for intraday at 100 with stop loss of 97.
- Stock moves to 105 slowly after sometime. You think your entry is great and begin taking MTM screenshots and send it to your friends. You don’t trail your stop loss (SL) or do not book partial/full profit as per your setup in an anticipation that the stock will move up further!
- Then comes a big red candle and stock falls back to 100. You assume it as retracement.
- After few minutes of hovering near your cost, it begins to fall to 98. You start becoming jittery. Your mind which has seen the profit, is now unable to accept loss. So u move your stop loss to 95 and hope it won’t get hit.
- Stock price falls to 96. You again think that it is a retracement and this time add another 1000 shares at 96.
- Stock moves to 99 slowly which is above your average cost of 98. You feel elated and do not book the partial profit again in the greed and hope to book more profit.
- Suddenly, another red candle and the stock drops to 96. Now you start feeling nervous and remove the SL thinking that it may hit.
- Your nightmare comes true and stock suddenly drops to 92. Now slowly you make up your mind to exit at your average cost of 98, if it comes.
- Stock moves in the range of 92 to 95 till half an hour left for the market close. Suddenly the stock price drops to 90.
- You then begin to search for fundamentals (which you dint earlier before picking the stock for trading) and see that the company has been showing good profit growth and has no debts etc. So you decide to hold the stock.
- Next day the stock drops another 5%. You don’t have any other capital left as you’ve put everything already in the stock.
- The stock continues to fall after some mild retracements during the next one week. You start speaking about the stock’s fundamentals to your friends. You think market is wrong and keep cursing the market. In reality your actions were wrong.
- After one month, the stock trades at 80. Your loss keeps mounting and now your original trading position has changed to a long term investment.
If this has happened with you as well, then I hope you’ve learned from the mistake. Save your friend or a family member from repeating the same mistake by sharing this post.
In stock market, psychology plays a big role and one needs to stick to their trading plan and execute it without fail!
Checkout other articles related to trading psychology here:
– Greed, Fear and Hope
– Stock Market: A Regret Machine