The following is a list of nine things you want to avoid at all costs. Any one of them can literally destroy your dreams and financial goals!
1. Trade with money you can’t afford to lose.
One of the biggest obstacles to successful trading is using money you really can’t afford to lose. Examples of this would be money that is supposed to be used to pay your child’s mortgage, bills, or college tuition. This is sometimes called “trading with scared money” and there is a very good reason for it. Ultimately what happens is that when someone knows in the back of their mind that they are risking rent money, they switch from fear and emotion versus logic and emotionlessness.
If you find yourself in this situation, I strongly recommend that you stop trading until you earn enough to deposit into an account that you can actually afford to lose without causing any major financial setbacks. You can start with as little as $2000 and trade stocks for less than $30.
2. The need to be “safe.”
We all have a need to make sure that the trade we want to do is going to be a good one. Therefore we look for signals that give us a confirmation to enter. This can come in a number of forms, for example… Tuning in to CNBC or the Wall Street Journal to give us news that our stocks are on the move or waiting a couple of extra days to make sure that the stocks really are flying and just not on a roll. false break. Other traders will get opinions from friends, family, or brokers. Others will wait for ten technical indicators to line up and give the “green light”.
This is all fine up to a point, however, the big mistake to avoid is taking so long that you let the trade take off without you. Interestingly, what ends up happening as a result of waiting too long is that it actually increases your risk. This is because as a stock goes up and up, there are fewer buyers left in the market and it can crash until more buyers come in. It’s like a game of musical chairs; eventually someone gets stuck without a chair.
The traders who wait and wait and wait to be safer are usually the ones who buy the highest tick just before the stock is sold. Then they beat themselves up thinking that they chose the wrong actions. Most likely it had nothing to do with his selection, just bad timing.
The thing to keep in mind is that there can be no absolute certainty in any given trade. All we can do is take a very educated risk along with a leap of faith!
3. Spend earnings before you get them.
Nothing is more exciting than entering a trade that takes off and puts you in a highly profitable position. However, this can cause big problems, because this type of trading puts you in a very euphoric state and leads you to daydream about the huge profits that are yet to come. You say, “Wow, I’m up 15% in two days already; I’ll be up 50% in a week and probably double my money in no time!” Then the next thing that happens is that you’re deciding on the big news because you’re going to buy or maybe telling your boss you can stick to it… Well, you get the idea!
The real problem occurs when you get caught up in the dream and the expectations. This makes you unprepared to exit as the market sells off and eats away at your profits because you have bought into the bottom line and will deny the reality of the situation.
The simple remedy for this is knowing where and how you will profit once you enter the trade. Also, keep in mind that the market will only go up as long as it wants and not as high as you think it should go.
4. Forming an opinion.
I’m here to tell you that the market doesn’t care about you or your opinions. Even if they are based on careful research or a “Wall Street guru”, it doesn’t matter!
Perhaps your view of the long-term market direction is correct, but that doesn’t mean that things can’t move against you in the short term. Remember that there are tens of thousands of merchants who also have an opinion. It is all these different opinions that can cause huge price fluctuations on any given day or week, regardless of your perspective.
5. Three 4-letter words that will kill you! HOPE — DESIRE — PRAY
If you ever find yourself doing one or more of the above while in a trade, you’re in big trouble! Like I said, the market doesn’t give a shit. All the hopes, wishes and prayers in the world are not going to turn a losing trade into a winning one.
When you mess up, just use a simple 4-letter word to correct the situation: SELL!
6. Not sticking to your plan
A big source of trouble arises when a trader starts to deviate from his strategy. Maybe one week they will trade according to one set of rules and the next they will use something completely different.
This flight through the seat of the pants always ends up backfiring. This is because the trader can never be sure what works and what doesn’t.
You should never deviate from your methodology once you start. As long as it’s statistically good, there’s absolutely no reason to change it. The way to make money with it is to trade it over and over again to exploit the advantage it gives you.
One thing you should also keep in mind is that a trader is more vulnerable to changing focus after a few losses. Therefore, pay special attention at these times.
7. Not knowing how to get out of a losing trade.
It’s amazing how many people I’ve talked to don’t have a clear escape plan out of a bad trade. Once again they hope, pray, wish and rationalize their position. As I keep saying, the market doesn’t care what you think. It does what it does and when you’re wrong you’re wrong!
The easiest way to prevent a bad trade from going really bad is to determine before you go in, where it will come out. You can use a dollar amount or at some target point, such as the previous bar’s 15-minute low.
***Make sure you don’t have “stunned deer in headlights” syndrome. This is where you see the stock drop to your stop loss point, but you can’t take action. Perhaps this is due to fear or disbelief that you are wrong, but unless you get out ASAP, you could end up in big financial trouble!
8. Have an ego.
I have seen several people get into the trading game who were very successful in other trading ventures. That’s why they had a pretty big ego and thought they couldn’t fail. Their egos became their downfall because they couldn’t except that they were wrong and refused to bail out bad trades.
Again, whoever you are or wherever you come from, it’s not about the markets. All the charm, the powers of persuasion, the number of diplomas on the wall or the business intelligence will not budget the market when it is wrong.
9. Falling in love with a stock or trade.
Let me give you an example of what I mean. In the spring of 1999, EFAX was a very popular stock. I waited to buy it in a dip and did so at $19/share. It started going up strong and life was great!
However, after a while, it started to return to my entry point and then below it. Here is the problem. For some reason, I really liked EFAX and became attached to it. Ultimately, she couldn’t let him go, even though she knew she had to. I justified and rationalized why my dear friend should recover, but he never did. I finally had to break off my love affair when the stock hit $9. (Oh!)
The moral of this story is to never fall in love, much less marry any lineage. It can cost you dearly!
I cannot stress enough the importance of principles in this article. Whether you’re a position trader, swing trader, or day trader, these principles can help you avoid some costly and painful financial mistakes. As they say, smart people learn from their mistakes and brilliant people learn from the mistakes of others.