If you're a beginner in trading, one of the most important things to avoid is using free money. Using margin is equivalent to buying stocks on your credit card, and can cause a large debt obligation. Ideally, use your own money instead of using borrowed money, even if you'll get a lower interest rate.
Avoid buying stocks in the bargain basement
Stocks that are in the bargain basement are usually undervalued, and that's a red flag. While it may tempt to buy cheap stocks, it is important to consider their fundamentals and price trends. Ideally, buy stocks that have sustainable growth prospects. While short-term price trends reflect price-driven demand and sentiment, long-term trends are determined by fundamentals.
Avoid scaling up based on a one-off scenario
While trading, it is crucial to avoid scaling up based on a one-time scenario. For example, a stock's value could double in a day, but you wouldn't want to increase your leverage to make that trade even larger. You should instead keep a detailed trading journal and use the data to determine trends and decide on your next trade.
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The first step is to understand your strategy's limitations and the risks involved. This will allow you to set realistic expectations and develop more effective scaling methods. Second, scaling up based on one-off scenarios can make you overshoot your limits. It can trigger impulse trading, over-leveraging, and account blowouts.
Avoid exercising a call
When trading stock, a call can be a risky strategy. If you are not familiar with it, a call is a put-like option where a trader will sell stock for cash. However, sometimes, exercising a call can be more beneficial than exercising a put.
While exercising a call while trading can cause a lower price than the one you bought, this strategy is not the best option if your call is in the money. The reason is simple: you will spend cash sooner if you exercise it. However, you can avoid this risk by keeping your cash in an interest-bearing account. Remember that disciplined investors seek to get the highest return possible on their assets.
