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5 traps and pitfalls that commonly catch out new traders

The number of Australians trading shares online had doubled in the past two years and while regulators welcome this surging interest in markets, new traders are urged to be careful.
The number of Australians trading shares online had doubled in the past two years and while regulators welcome this surging interest in markets, new traders are urged to be careful. The sudden influx of new traders – which is being attributed to coronavirus lockdowns giving Australians more spare time to experiment in markets – was met with cautious optimism from ASIC executive director of markets Greg Yanco. “Everyone is entitled to take risks. However, we advise first-time investors to focus on long-term goals and not make rash decisions based on a fear of missing out on market falls or gains,” he said.  “We also recommend learning about trading before you start or getting advice from someone you trust.” To get more insight into these ‘rash decisions’, Reach Markets spoke with experienced trader and head of the Implied Volatility options trading desk Tim Gilderdale, CAIA, to get a better understanding of the common traps catching traders out.

Panicking when markets move against them

Although investors have developed numerous ways to try to predict how markets will pan out, these are not 100% reliable and sometimes markets won’t move the way traders had hoped. For new traders, fear can set in when markets move against them and in a panic, some will try to close out their positions to limit the damage, Mr Gilderdale said. Unfortunately, closing at a loss like this will only crystallise that damage, locking in fiscal injury when waiting may have reversed the pain.

Not closing a position after hitting target price points

As you go through the process of generating a trade idea, most traders will determine an exit point for the strategy. The market can change quickly however, to your benefit or to your detriment. It is easy to make the mistake of holding a successful position expecting further gains rather than closing the position and realising the profits. Many traders will have more clarity on the ideal exit point when first placing the trade, in contrast to getting nervous about the position once the money is in the market.

Rolling losing positions into another month

Another common mistake new traders make is rolling their losing positions into the following month to chase their losses. Rolling is seen by some traders as a way to buy time in the market. It involves closing a short dated option and opening a longer dated option, potentially with an altered strike price. In effect, this means closing out a losing position then reopening a new position, which in actuality, they may not want to hold. The best way to think about the trade is this: After closing a losing trade, would I reopen this position if it wasn’t for my previous losses?  If the answer is ‘no’, you may be better off just taking the losses and moving on.

Not being prepared for a change in market behaviour

The phrase ‘madness of crowds’ comes up regularly when discussing investing – with the infamous ‘Dutch Tulip Bubble’ often cited as an example of how the behaviour of market participants can affect the markets themselves.   And if the sudden-implosion tulipmania demonstrated anything, it’s how quickly the behaviour of markets can change and leave unprepared investors holding the bag – or should that be vase? Mr Gilderdale said traders need to keep an eye on any changes in market behaviour. Is the market moving sideways after a strong bull run? Is the market experiencing higher volatility? Are there economic, political or geopolitical events shifting market behaviour?

Going all in on one position

Variety is the spice of life, and for traders it can be a lifesaver, too. Diversification is key to any investment strategy, and is key to trading strategies as well.  Eventually you will make a bad trade and if you are going all in on every position, this means you will eventually lose a significant amount of money.  Opening multiple positions over multiple underlying assets can deliver a diversification benefit, as can selecting a range of different expiry months. The upside is if one of these positions doesn’t work out, you won’t lose your whole portfolio. You can also trade out of the winning positions and crystallise your gains while waiting for the underperformers to catch up.  The downside is you have more positions open, potentially some that you have a lower preference for. You can also still lose a significant portion of your portfolio, but it’s less likely. If you would like to try the best options trading technology in the Aussie market, with the nation’s lowest options brokerage fees, click here for a trial of our Implied Volatility options trading platform. From 5 October 2021, under Design and Distribution Obligations, anyone opening a trading account will be required to meet the Target Market Determination criteria of Phillip Capital and subject to an assessment the results of which will determine your eligibility for a trading account, for further information please see https://www.phillipcapital.com.au/files/PCAU/PhillipCapital_TMD_Options_WEB.pdf Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. Past performance is not a reliable indicator of future performance. The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss. If you are thinking about acquiring a financial product, you should consider our Reach Markets Financial Services Guide (FSG) including the Privacy Statement.
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