Is there anyone left in the UK who does not have an e-brokerage account or at least know someone who has one? Certainly you'll find it difficult to find any British Asian who doesn't at least know someone who trades online. Online trading looks set to become as common as having a mortgage.

Low commissions are a good reason for many to trade online. But according to the Barber study it appears that those trading offline tend to beat the market by about 2% per annum, yet when they go online they suffer in their returns - lagging the market by 3% annually. This despite the lower commission costs.

One major cause of the fall off in performance is that in going online, traders tend to trade more actively. According to psychologists, humans have a tendency to be overconfident in their own abilities and their knowledge. They tend to attribute any success to their own abilities even when that is not warranted. Remember the old market saying, "don't mistake a bull market for skill." The recent bull market is partly to blame for this overconfidence.

Also leading to overconfidence is the availability of information, of which there is in abundance online. The more information you give someone the more overconfident they are likely to become. The illusion of knowledge leads to the illusion of control for the online trader. Overconfidence leads to more speculative trading without proper detailed analysis and that leads to greater losses and worse online trading performance.

Five Hot Tips

These are some tips to help you avoid the trap:

Risk Management: On a detailed analysis of the stock you plan to trade in, is the upside potential greater than the downside risk by a ratio of at least 2:1? If for instance you bought 100 shares of XYZ at 1000p, expecting a rise to 1200p, it would not be wise to say you will stay with the trade even if the stock hits 400p. In other words, how high do you expect it to go, and how low could it go before you knew it was not going to turnaround and you had better exit?

Objectivity: Maintaining an objective view about a trade is essential to being able to exit without 'psychological' difficulties. Do not become attached to a stock. The key issue is one of probability; is the expected gain on the upside greater than that on the downside?

Stop Losses: Have you set an exact price level at which you are not willing to accept further losses and will exit? This stop-loss cannot be too close to the price where you entered your position; otherwise even a small down move may trigger your stop loss and cause you to exit. On the other hand it cannot be too far from your entry price level otherwise you may lose all your investment before deciding to exit.

Discipline: Having formed a trading plan, stick to it! It is surprising how many traders ignore their exit levels when the time comes to pull the trigger because their mind comes up with a hundred reasons not to exit.

If you want to know what makes good and bad companies? Then go and listen to their executives speak and compare their rhetoric to their share prices.

Believe in the power of prayer

In Germany online trading comes with a spiritual health warning with Evangelical churches concerned about the search of quick profits. In my experience there is no conflict between online trading and spirituality - most online traders pray like crazy!