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9 Deadly Trading Mistakes!
The following is a list of nine things you want to avoid at all costs. Any one of them can literally destroy your financial dreams and 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 the mortgage, bills or your child’s college tuition. This is sometimes called “trading with scared money” and there is a very good reason for it. Ultimately what happens when someone knows in the back of their mind that they are risking the rent money, they trade out of fear and emotion versus logic and no emotion.
If you are in this situation, I highly recommend that you stop trading until you have earned enough to put into an account that you can really afford to lose without causing major financial setbacks. You can start with as little as $2000 and trade shares under $30.
2. The need to be “sure”.
We all need to make sure that the business we want to do will be good. That is why we look for signs that will give us confirmation to enter. This can come in several forms, for example… Tuning into CNBC or the Wall Street Journal to give us news that our stock is moving or waiting a few extra days to make sure the stock is really flying and just not on a false breakout. Other traders will get opinions from friends, family or a broker. Others will wait for ten technical indicators to line up and give the “green light”.
All of these are fine, however the big mistake to avoid is taking so much time that you let the business take off without you. Interestingly, what happens as a result of waiting too long is that you actually increase your risk. This is because as a stock moves higher and higher there are fewer buyers left in the market and it can fall until more buyers step in. It’s like a game of musical chairs; eventually someone is caught without a chair.
Traders who wait and wait and wait for more certainty are usually the ones who buy the highest tick right before the stock sells off. They then beat themselves up thinking they picked the wrong stock. Looks like it had nothing to do with their choice, just bad timing.
The thing to remember is that there can be no absolute certainty in any business. All we can ever do is take a very educated risk along with a leap of faith!
3. Spending profits before you make them.
There is nothing more exciting than getting into a business that is booming and putting you in a very profitable situation. This, however, can cause serious problems, because this type of business puts you in a very euphoric state and leads to daydreaming about the huge profits yet to come. You say “Wow, I’ll already be up 15% in two days; I’ll be up 50% in a week and probably double my money in no time!” Then the next thing that happens is you decide on the cool new car you’re going to buy or maybe tell your boss he can stick it… Well you get the idea!
The real problem occurs when you get caught up in the dream and expectations. This causes you to not be ready to exit because the market is selling off and eating into your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation.
The simple remedy for this is to know where and how you will take profits once you enter the business. Also note that the market will only go up as long as it wants to and not how high you think it should go.
4. Form 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 painstaking research or by a “Wall Street Guru”, it doesn’t matter!
Maybe your view on market direction in the long term is correct, but it doesn’t mean that in the short term things can’t move against you. Remember that there are tens of thousands of traders out there who also have an opinion. It’s all these different opinions that can cause big fluctuations in price 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 trading, then you are in big trouble! As I said before, the market doesn’t matter at all. All the hoping, wishing and praying in the world won’t turn a losing business into a winning one.
When you make a mistake, just use a simple 4 letter word to correct the situation – SELL!
6. Don’t stick to your plan
A big source of problems arises when a trader starts to deviate from his strategy. Maybe one week they’ll be trading by one set of rules and the next they’ll be using something completely different.
This flying by the seat of the pants always ends up backfiring. This is because the business owner can never be sure what is working and what is not.
You should never deviate from your methodology once you start. As long as it’s good statistically, there’s absolutely no reason to change it. The way to make money from it is to trade it again and again to exploit the edge it gives you.
One thing to also be aware of is that a trader is most vulnerable to changing approaches after a few losses. So, pay special attention in 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 for getting out of a bad business. 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 becoming a really bad one is to determine before you enter where you will exit. You can use a dollar amount or at any target point such as the minimum of the previous 15-minute bar.
***Be careful you don’t get the “stunned deer in the headlights syndrome”. This is where you see the stock fall to your stop loss, but you can’t take action. Maybe this is out of fear or disbelief that you are wrong, but unless you come out right away, you could end up in serious financial trouble for me!
8. Having an ego.
I have seen a number of individuals enter the business game who have been extremely successful in other business ventures. Because of this they had a rather large ego and thought they could not fail. Their egos became their downfall because they could not except that they were wrong and refused to bail out of bad businesses.
Again, whoever or where you came from is irrelevant to the markets. All the charm, powers of persuasion, number of degrees on the wall or business acumen will not sway the market when you are wrong.
9. Fall in love with a stock or business.
Let me give you an example of what I mean. Back in the spring of 1999 EFAX was a really hot stock. I expected to buy it on a dip and did so at $19/share. It started moving strong and life was great!
However after a while, it started going back to my entry point and then below it. Here’s the problem. For some reason I really liked EFAX and somehow got attached to it. Ultimately I couldn’t let it go even though I knew I should. I justified and rationalized why my dear friend should rebound, but it never did. I finally had to break off my love affair when the stock hit $9. (Ouch!)
The moral of this story is to never fall in love, let alone marry any stock. It can cost you a lot!
I cannot stress enough the importance of the principles in this article. Whether you are 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.
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