Identify Your Investment Strategy. DEVELOP YOUR FINANCIAL PLAN 

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Identify Your Investment Strategy. DEVELOP YOUR FINANCIAL PLAN

Your investment strategy conforms to your objectives and asset allocation plan. Your perception of how efficiently stock and bond markets process relevant information with regard to the pricing of their securities determines your investment strategy. If you believe that securities markets are efficient, meaning that all current and new information is reflected quickly and efficiently in stock and bond prices, you would pursue a passive investment strategy. For example, when there are undervalued stocks, they will be bought immediately, driving up their prices to their fair or intrinsic values. Consequently, there will be very few underpriced or overpriced stocks in an efficient market. An efficient market means that few investors will be able to consistently beat the market returns on a risk-adjusted basis (seeking returns that are greater than the market by investing in securities with the same level of risk). Investors who believe that the markets are efficient would hope to do as well as the market averages, seeing that they cannot beat the market averages. Such investors would pursue a passive investment strategy of buying and holding a diversified portfolio of stocks that resemble market indexes.

If investors believe that the markets are inefficient (slow to reflect pricing information), there will be many under- and overvalued stocks. Consequently, such investors use financial and technical analysis to find those underpriced stocks in order to earn larger returns than those of the market averages. Investors following an active investment strategy buy stocks when they are undervalued and sell those stocks when they are perceived to be overvalued. Asset allocation plans change in response to circumstances in the market, and the percentage allocated to stocks will increase when the stock market is perceived to be undervalued and will be reduced when the stock market is perceived to be overvalued.

Categories in Trading Mistakes

Lack of Trading Plan
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Using too much Leverage
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Failure to control Risk
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Lack of Discipline
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Useful Advices to Beginning Trader
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