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6 trading pitfalls new investors should avoid when starting out

·4-min read
A young woman looks at a stock price on her phone.
Here are six things new investors should avoid when starting out their investment journey (Source: Getty)

COVID-19 and extended lockdowns has brought on a surge in popularity of online trading, as many Aussies look to become first-time traders.

Jeremy Kinstlinger, co-founder of Global Prime, warned that without proper education and awareness of the many risks involved, new traders could leave themselves open to being taken advantage of.

“Many people don’t know this, but it’s completely legal for a broker to trade against their client and profit off their losses,” Kinstlinger said.

“In this industry, it’s what we call having a B-book model. However, if you profit off your client’s losses, can a broker really have your client’s best interests at heart?”

For new traders seeking a good start in the world of online trading Kinstlinger said there are six pitfalls beginners need to be on the lookout for.

1. Not understanding the risks involved

When starting out with trading, everyone needs to understand there is the risk of losing the money you put in, but this shouldn't scare you off.

It just means you need to fully understand the risks you are taking and never invest more than you’re willing to lose.

“If a trader goes in without a good understanding of risk management they are more likely to lose,” Kinstlinger said.

“There are risks such as black swan events that can wipe out an entire account if the trader took on too much exposure (risk) on their account.”

2. Being afraid to ask questions

There is no stupid question when it comes to trading, especially when you’re starting out.

It’s better to have a complete understanding of what you’re doing and how everything works, so don’t be afraid to ask.

“Asking your broker questions like ‘did you profit off my loss’, ‘can you share the Automated Trading Receipts with me’ for example, will make it clear you are going to hold your broker accountable,” Kinstlinger said.

“Keep in mind that if a broker does not offer trade receipts showing they were not on the other side of your trade you won’t know for sure if they are profiting from your losses.”

3. Not enough emphasis placed on the psychology of trading

Following market trends can sometimes only get you so far, Kinstlinger said, so having a solid understanding of a trading mindset can help.

“You can have the best strategy in the world, but without the right mindset a trader is bound to lose eventually. A trader needs to be cool and calculated and not adjust their trading based on their emotions,” he said.

“Unless a trader has learned to manage their impulses and emotions, they will most likely run into problems.”

4. Not having the right guidance and mentoring

It can be information overload online when it comes to finding a strategy to trade with, Kinstlinger said, so try to find a strategy that works for you and your circumstances.

“It can be tough for a beginner to sift through the information and formulate a plan,” Kinstlinger said.

“Having a great mentor can really help push a trader in the right direction, and if they take it seriously they can be held accountable to their trading mentor as well, just like a sporting coach.”

5. Trading without a plan or strategy in place

Kinstlinger said that trading without a plan can and should be likened to gambling.

“Having a set plan and strategy in place and journaling trades helps to stick to the plan which means not making decisions on the fly,” he said.

“Knowing when to enter and exit a trade before the trade is entered and not adjusting mid trade will help you to stay on track.”

6. Not choosing the right broker

Kinstlinger said there are some warning signs to be aware of that point to a broker maybe not having your best interests at heart.

Most traders learn the hard way to steer clear of high-pressure tactics, deposit bonuses or incentives, he explained.

“If a broker is trying very hard to get a beginner on board it’s usually not a good sign as most profit from trader losses and won’t have the trader’s best interests at heart,” he said.

“Traders will want to find a well-regulated broker with a personal support team, good pricing, and execution of their trades as well as public access to the founders or upper management in case they run into issues.”

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