When it comes to index trading, making mistakes and partaking in your learning journey is a part of the whole package. Regardless of whether you’re an investor or a trader, both parties are often guilty of making the same, easily avoidable mistakes that lead to unnecessary risks.

Below, we have compiled a list of six essential mistakes and how you can avoid them.

1. Not Doing Extensive Research

Never step into index trading based solely on a ‘tip’ or a gut feeling. While these do often yield results, it is essential to conduct extensive market research and study all the trends before you take the plunge. Any tip you receive should be backed by clear evidence and a thorough understanding of how the market works.

Make sure you study the volatility of that specific market. Find out if it’s an exchange or an over-the-counter deal. All of these components will help you determine whether it’s worth committing yourself to that market.

2. Trading Without a Solid Plan

You will never find an experienced trader making investments without having a clearly defined plan. They map out their exact points for entering and exits, how much capital they plan to invest, and even the maximum amount of loss they’re willing to bear.

When it comes to novice traders, they often struggle to develop solid plans for their investment. Doing your research beforehand will help you out with this. Moreover, it would be best if you always tried to stick to your plan even when you’re tempted to reverse your course after a bad market day. Sticking to your blueprints will help you find a stable and secure way into index trading without getting caught off guard by unexpected losses.

3. Failing to Cut Your Losses

It can be tempting to le losing trades run on in hopes of a market turn. Unfortunately, this practice often does more damage than good for an investor. Failing to cut your losses can be a grave error and further damage your chances of earning profits elsewhere.

This is mainly applicable to short-term trading since it runs on quick market actions. Trying to ride out a slump rarely ever works since all the active positions will be closed off as the trading day ends anyways.

4. Over-diversifying Too Quickly

It’s a fact that diversifying your trading portfolio can help you minimize loss if one of your asset’s value decreases. However, over-diversifying within a short period of time is a common rookie mistake that will leave you with more than you can chew.

Diversification does offer you a higher potential for returns, but it also requires a lot more work. You will need to keep an eye on the news and current events constantly. There will be more tracking to do, and this extra work is often not worth the reward. This is especially true if you’re starting out with index trading.

A better alternative is to consider ASX SPI futures. They allow you exposure to Australia’s highest performing companies without you needing to buy or sell shares on multiple companies in the index.

5. Losing Sight of Risk Aversion

Risk tolerance is an essential part of index trading. Since every form of investment return comes with its own shares of possible risk, you need to be prepared beforehand. Unseasoned investors often struggle with the volatility of the stock market, the constant ups and downs leading to stress and anxiety. Additionally, some people prefer a steady, reliable income with low risk. These people are better off investing in ASX 20 or blue-chip stocks of well-established companies.

6. Forgetting the Five Year Rule

The 5-year rule should always be at the forefront of your mind when index trading. It advises you not to invest money you’ll need within the next five years for a large purchase. This could be a mortgage plan or even your dream car. Whatever the upcoming expense is, remember not to invest money that you know you’ll be needing soon.

Long-term investing has always had the edge over short-term investing. This is because the market is subject to highs and lows, with numerous global events leading to significant changes. Long-term investing allows you to balance out your loses and gains, ensuring you end up on top when you finally do collect your returns.

At the End

Index trading can open doors to benefiting from large gains and equally-sized losses too. With endless pieces of advice available on various investment forums, novice investors often rely on other people’s tips when making their plans. This may serve you well, but remember that there is always a chance of coming across misleading advice or faulty tips. The smartest plan of action would be to use these investment forums as a starting point and then conduct your own research before entering the market. All the best!