The world of retail investing can be a harsh and unforgiving landscape, so what can you do to ensure that you don’t fall into Wall Street’s many pitfalls?

Many retail investors lose money, and this is a fact that will never change. Factors such as inexperience, a lack of time efficiency, and fluctuating levels of commitment to identifying winning strategies can all go against more casual traders.

According to Capital data that recorded trader behaviour over 18 months, more than 70% of trades executed on Capital.com were closed within 24 hours, and as much as 45% of trades were closed within 60 minutes. Additionally, losing positions were closed 1.4 times more frequently within five minutes than winning ones.

This insight illustrates the extent to which disposition bias impacts retail traders. This psychological phenomenon causes more investors to sell assets that have increased in value and hold on to their losses for longer, causing them to diverge from their trading strategies and risk management at the risk of compounding their losing positions.

While many retail traders know how to take their first steps in executing trades, there are many core facets of the industry that they may need to be made aware of. With this in mind, let’s take a deeper look at six key considerations that you’ll wish you’d learned sooner about trading stocks:

1.  Don’t Settle on a Strategy Straight Away

This may sound counterintuitive, but it takes time for you to discover a trading style you’re most comfortable with. Yes, this approach could lead to inconsistent results as you refine your strategy, but it’ll help you to understand the areas of trading that you’re far more comfortable with.

The world of trading is wildly varied, and many retail traders can make the mistake of confusing day trading and daily trading in a misunderstanding that could see their budget eaten into because of a lack of fluency.

With this in mind, it’s worth beginning your trading journey with a smaller budget and sampling different strategies to see what feels most natural to you. Many good platforms offer demo accounts with play money, and this can be a great asset to hone your idiosyncrasies into a winning trading strategy.

2.  Respect the Dunning-Kruger Effect

Ever heard of the Dunning-Kruger effect? Most of us have lived it. The effect illustrates the high confidence that we can have when beginning to take on new skills and hobbies before we gain a little more knowledge and realize just how incompetent we are as novices.

If you’re taking your first steps in trading, the Dunning-Kruger effect will impact you in different ways. As you begin to trade, you risk overconfidence in identifying trades without sufficient research or due diligence.

Likewise, when you gain more experience, you could become uncertain surrounding trades that conform to your strategy because of the temptation to second guess yourself.

When the Dunning-Kruger effect begins to impact your trading, always remember to look to your strategy and attempt to take the subjectivity out of your decision in favour of a more data-driven approach.

3.  Specialize in What You Know

Just like authors are told to ‘write what you know,’ traders should prioritize trading what they know.

While there’s nothing wrong with deviating from your best-known regions and industries, your background knowledge of specific areas of investing will be a major component in acting more efficiently in identifying opportunities and making measured risk assessments.

Delving too frequently into trades that you have little fundamental knowledge of can be similar to gambling and comes with an increased risk of getting caught in losing positions.

4.  Learn From the Best

Experienced traders can help guide you as a leader in their respective fields. This can help you to benefit from the experiences of others throughout the industry.

Whether you decide to ask questions to trading influencers on social media, research the strategies of high-performing traders on YouTube, or read the biographies of the industry’s most renowned figures, it’s important to shape your perspectives on how to trade stocks.

Successinge trading platforms offer copy trading as a means of mirroring the activity of some of the industry’s most successful traders. There’s no harm in opening a copy trading account to gain a more fundamental understanding of how the best build their wealth.

5.  Get to Know Your Emotions

You may be familiar with ‘tilting’, which is the name given when gambling by chasing your losses. This can be a leading cause of pain in the world of trading, and retail investors are particularly vulnerable to going on tilt when things go south.

Both winning and losing trades can have an impact on our emotions. Tilting may be prevalent for many traders, but so too can the ‘hot hand’ paradox, where you’ve executed so many successful trades that you believe that you’re more likely to make a profit on the next one.

When we make decisions influenced by our emotions, it risks undermining our strategy and increasing the likelihood of clouding our judgement.

If you’re on a winning or losing streak and you’re noticing that your emotions are causing you to deviate from your strategy, it’s best to take a step back, give yourself a break, or complete a task that isn’t associated with trading to refocus your mind.

6.  Learn About Taxation

Finally, taxation can be a nuisance to get to grips with for retail traders. Because this approach to investing relies on the frequent buying and selling of securities to profit from price movements, trading can be a challenge to monitor for tax purposes.

If you’re a trader in securities, your tax commitments could involve deducting trading-related expenses to prospectively qualify for various tax benefits.

Traders in the US are required to report their trading gains and losses on Schedule C (Form 1040) as ordinary income or loss, and this means that gains are taxed at ordinary income tax rates, which may be higher than long-term capital gains rates.

Likewise, trading expenses like brokerage and platform fees, or education expenses related to trading, can be deducted from gross income in the US, helping to reduce the taxable income for traders.

All retail investors should take some time to research the local tax implications associated with trading to gain a better understanding of their profit and loss in real terms.

Trading on Your Terms

The world of trading can be a wild and unpredictable place for many retail traders, and there will always be insights and tips that you’ll only recognize long after you’ve taken your first steps towards building a sustainable strategy.

However, taking a measured approach to trading and avoiding diving in can help you to create an approach that helps to play to your strengths and paves the way for a better industry understanding.

Trading is complex, so don’t rush in. Take your time, build your competencies, and understand your emotions. If you can operate with these considerations on mind, you’ll be well-positioned to find success trading on your terms.