Three Fatal Mistakes to avoid in Stock Markets

Those who know me or have been following me for a while understand that I constantly push you to challenge your mental barriers and pursue your dreams. But this article is different—it focuses on the foundational principles of trading, which I see as the basic hygiene of the craft. Without these, scaling up or even sustaining long in the markets will never be possible.

In the past few weeks, since the brutal market decline began, I’ve received numerous distressed messages. Many were under extreme stress because they invested money crucial for their families and children without proper understanding or planning. This is common in bull markets, where luck is often mistaken for skill, leading to overconfidence and decisions that not only shake our belief in ourselves but also cause lasting pain. Many were young—some had left their jobs or chosen not to take one, believing the markets would remain the same forever or that they had the skills to navigate a bear market. Now, with their hopes shattered, many are facing severe financial distress.

If I were to summarize the root causes of their agony, they mostly boil down to three primary mistakes—ones that every investor or trader, especially in their early years, must avoid at all costs.

A] THERE IS NO SUCH THING AS A MENTAL STOP-LOSS

A few days ago, I was talking to a friend I consider as one of the most promising traders in my circle. During our conversation, he mentioned a drawdown in his portfolio. I assumed it would be a normal 5%-7% decline, or at most 10%-12% since he was using MTF. Given his discipline, I never imagined he would mismanage leverage.

What sent a shiver down my spine was the figure—a staggering 50% drawdown on his portfolio. I told him, "I don’t think you’re indisciplined, so what caused this?" After all, anyone who simply places a stop-loss could never, even in the wildest scenario, experience such a massive decline.

His answer, however, wasn’t surprising. The culprit was exactly what I expected—no stop-loss in the system, only a so-called "mental stop-loss."

I might sound harsh here, but I firmly believe this: anyone who doesn't implement a stop-loss in the system is not a trader—they're essentially a gambler and can't be trusted with serious money. Either you trade with a stop-loss that’s in place at all times, or you're simply gambling. And there’s no such thing as a mental stop-loss, because you’ll never be able to honor it when it’s most needed.

I asked him, when you had a stoploss, why didn't you keep it in the system? His answer was that he thought operators would hunt it. Now, I don't want to take an extreme stance like some who believe everything in the market is manipulated by operators, nor do I want to deny their existence completely. From my experience, I know that stop-loss hunting happens, and I can even prove it with charts. But what I will say is this: a stoploss that gets hunted by operators will cause far less damage than the mental stoplosses that people rely on.

With over a decade of experience in the market, I urge you all, with utmost sincerity—KEEP THE DAMN STOPLOSS. KEEP IT IN THE SYSTEM AT ALL TIMES.

The above image from @TraderLion_ outlines the phases a trader goes through in his trading career. You know what is fundamental to your transition from Stage 1, the Unprofitable Trader, to Stage 2, the Boom-and-Bust Trader? It’s placing the stoploss. This simple discipline will ensure you stop losing money in the market.

While I admit I have a small exception to this rule for short durations to accommodate specific market tendencies, I firmly believe in keeping a stoploss in the system at all times. This allows me to navigate all market conditions, scale up, and trade with significant sizes and serious money that I cannot afford to lose. Even in the worst situations, it ensures I can exit unharmed. Placing a stoploss is fundamental to trading, and there are no excuses for neglecting it.

B) NEVER TRADE WITH BORROWED MONEY

While this might sound like another generic piece of advice, and you may not be surprised at all, thinking that I've fallen into the trap of giving "commodity gyan," you can't imagine how often this simple rule is ignored. Despite being repeated countless times across financial platforms, it's a major culprit in destroying the dreams and ambitions of young traders and investors.

When we're young, we all start small, often with money from our family—small, non-serious funds given to us as a way to test the waters. There's usually a promise from our parents to increase it if we start doing well in the market. We all want to scale up quickly, especially with the encouragement of a bull market that makes us view trading as a serious source of income. Unfortunately, we haven't produced satisfactory results yet that would prompt our parents to increase our capital, and we don't have enough income of our own to invest further.

Enter the "superstar Rajinikanth" of our story – the God-sent angel, whether it's an uncle, bhaiya, or friend, who comes with all the money and a desire to make a profit from the markets. They lend their portfolios to us with a profit-sharing agreement. The amount, often multiples of our own portfolio, feels like a shortcut to getting rich quickly.

But all these "Mungerilal ke haseen sapne" soon face reality and come crashing down as the market falls, and our portfolios begin showing losses. We hope they will break even soon, convincing ourselves that all our stocks are high-quality picks (mistaking quality for momentum and the noise around the stock). However, as Mark Minervini suggests, these momentum stocks are often the ones that fall the hardest during the subsequent bear market (the 80-50 rule).

Such arrangements often lead to immense mental pain, lifelong guilt, and strained relationships. Even if your uncle, bhaiya, or friend doesn’t ask for the money back, it still leaves you in a position where you can no longer speak to them with the same self-respect you once commanded. And if he asks for it, as he rightfully should, it creates a huge financial strain on you and your family, especially if you come from a not-so-strong financial background.

Even if you can't afford to start big, always begin small and never borrow money to trade in the market. I promise you, once you acquire the necessary skills and can take on a bit more risk, you’ll be able to multiply your portfolio quickly. But never, ever borrow money. If you need additional capital, trade on leverage through MIS or MTF with brokers, but never involve friends or family in your trading.

Many times, we trade with borrowed money just to show off to friends or on social media. This creates an endless competition, a rat race that we impose on ourselves. There will always be people trading with much larger sums, making profits that seem unimaginable. It's easy to get caught up in the excitement and feel pressured by those screenshots showing huge sizes and profits.

In our rush to join the ranks of others, we often forget that for many people, what we own and how we live is something significant. Their daily wages are far less than what we might lose in a single stoploss, and in many cases, it’s even equal to their monthly earnings, on which they sustain their entire life. Be thankful to the Almighty for what you’ve been provided, respect the wealth, Laxmi, you have, and build the strength and discipline to grow it. Once you’ve established that foundation, then you can participate in the league you aspire to be a part of.

C] NEVER CONFUSE MOMENTUM WITH QUALITY

In the stock market, there are three primary approaches to trading or investing: value, growth, and technical. While each method can independently generate profits, they are part of the same equation and are incomplete on their own. Value drives liquidity, which in turn leads to price appreciation, as strong hands typically invest in alignment with the company's valuation. Growth represents the potential future value, and it's pursued by all market participants, whether institutions or retailers. As a result, during any 6-month to 2-year period, growth stocks tend to dominate the top gainers list in the market.

Technical analysis, on the other hand, is how you are compensated in the market, whether you invest for value or growth. In my entire career, I've yet to encounter anyone who solely relies on a company's earnings paid through dividends, without factoring in price appreciation in stocks. In addition, the foundation of technical analysis, which asserts that price discounts everything, is as integral to the market as value is in driving liquidity, ultimately leading to price appreciation.

However, among these three approaches, those who trade based on value or technicals can still endure tough markets, but those relying solely on growth often face the worst setbacks in a bear market. They mistake growth and momentum for quality, ignoring the sky-high valuations of momentum stocks. Their investments come late in the trend, driven by bull market narratives that are already priced in, momentum fueled by institutional buying that has peaked, and earnings growth that is fully discounted and nearing its peak.

Since they view these highly popular momentum stocks as quality stocks, they often avoid placing stoplosses, convinced that these stocks will become the next Divis Labs, HDFC Bank, or Bajaj Finance. They see every correction as temporary and believe the stocks will continue rising indefinitely, failing to recognize that they are chasing an already exhausted Stage 2 uptrend.

This approach results in massive losses, often a 30%-50% portfolio decline in the first leg of a bear market. As prices crash and their dreams of making money shatter, they start hoping for a relief rally to recover to breakeven levels for an exit. However, this hope only deepens their predicament, prolonging the losses. By the time a relief rally arrives, the damage is usually far worse.

They eventually book losses, often during the final leg of the bear market decline, in a state of panic—by which time their losses have escalated beyond 50% and, in many cases, even 80% of their invested capital -

As Mark Minervini said in Think and Trade Like a Champion, “There is no such thing as a safe stock. That’s like saying there’s such a thing as a safe race car. Like race cars, all stocks are risky.” Don’t mistake momentum stocks for safe bets based on past performance. The past is already priced in, and the future often unfolds very differently.

We can never be certain where a stock is within its cycle—it could be early or late. It might enter the next leg of Stage 2, delivering triple-digit gains, or transition into Stage 3, leading to a Stage 4 decline. However, avoiding losses doesn’t depend on precisely identifying the cycle phase. It depends on having a stoploss to protect capital and a trailing stoploss to secure future profits.

Hence, don’t consider momentum stocks as safe. Place the DAMN STOPLOSS and keep it in the system at all times. You can set a deeper stoploss to avoid unnecessary shakeouts and re-enter if needed, but having no stoploss is like jumping from a helicopter without a parachute and hoping for a safe landing. Businesses don’t run on hope; they thrive on meticulous planning for all possible scenarios.

Many of you may ask, “We’re already down 30% in the recent crash, and it’s hard to take a loss now. What should we do?” The best time to sell was when the stock was at breakeven or in profit. The second-best time is NOW. The 30% loss you’re trying to avoid, hoping for a recovery, can easily turn into a 50% or even 80% loss.

RESET, REORGANIZE, AND RESTART—BUT RESTART WITH A FOOLPROOF PLAN. The law of nature is survival of the fittest, and the stock market is no different. You can't remain weak and hope for mercy from a market that is often brutal and indifferent to the consequences upon you of its actions.

Different traders have different specialties—some operate at such large scales that even small profits lead to life-changing outcomes, while others excel at producing consistent super performance, resulting in massive portfolio growth that inspires others. Some can identify long-term trends early and capitalize on them with a decent size throughout the entire Stage 2 advance, while others thrive in unfavorable market conditions by efficiently utilizing available resources. However, all of them are bound by one common principle: rigorous risk management. The consequences of every decision they make are well-accounted for and meticulously planned. This is the foundation upon which the skyscraper of success is built. To achieve success in the market, you too must master this crucial aspect.

I conclude this article with the hope that it reaches those who need guidance, especially those who might be making the mistakes I've mentioned and have yet to face their consequences. I wish you all success, but always remember, success is hard-earned. You may cross a road with your eyes closed once, but not repeatedly. So, give due respect to this highly dynamic and challenging field, and learn how to master it the right way—not through hope or luck.

I look forward to connecting with you again soon and sharing something valuable. Until then, I wish you all the best and seek your love and blessings as always. Good night!

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