The following are a list
of nine things you want to avoid at all costs. Anyone of them can
literally destroy your financial dreams and goals!
1. Trading with money you can't afford to lose.
One of the greatest obstacles to successful trading is using money that
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 referred to as “trading with scared money” and
there is a very good reason for that. Ultimately what happens is that 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 earn enough to put into an account that you truly can afford to lose
without causing major financial setbacks. You can start with as little as
$2000 and trade stocks under $30.
2. The need to be "certain".
We all have the need to make sure that the trade we want to make is going
to be a good one. Therefore we look for signs that will give us a
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 on
the move or waiting for a couple of extra days to make sure that the stock
is really flying and just not on a false breakout. Other traders will get
opinions from friends, family or broker. Others will wait for ten
technical indicators to line up and give the “green light”.
All of these are okay to a point, however the big mistake to avoid is
taking so much time that you let the trade take off without you.
Interestingly, what ends up happening 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
come tumbling down until more buyers step in. It is like a game of musical
chairs; eventually someone gets caught without a chair.
Traders who wait and wait and wait to make extra sure are usually the ones
buying the top tick just before the stocks sells off. They then beat
themselves up thinking they picked the wrong stock. Odds are it had
nothing to do with their selection, just bad timing.
The thing to keep in mind is that there can be no absolute certainty in
any given trade. All we ever can do is take a very educated risk along
with a leap of faith!
3. Spending profits before you make them.
Nothing is more exciting then getting into a trade that blasts off and
puts you into a highly profitable situation. This can cause major problems
however, because this type of trade puts you in a highly euphoric state
and leads to daydreaming about the huge profits still to come. You say
“Wow I’m already 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 are
deciding on the great new car you are going to buy or perhaps telling your
boss that he can stick it… Well you get the idea!
The real problem occurs
as you get caught up in the daydream and expectations. This causes you to
not be prepared to get out as the market sells off and eats up 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 trade. Also, realize that the market will only go up as
long as it wants and not how high you think it should go.
4. Forming an opinion.
I’m here to tell you that the market does not give a damn about you or
your opinions. Even if they are based on painstaking research or from a
“Wall Street Guru”, it doesn’t matter!
5. Three 4-letter words that will kill you! HOPE---WISH---PRAY
If you ever find yourself doing one or more of the above while in a trade
then you are in big trouble! As I have already said, the market doesn’t
give a damn. All the hoping, wishing and praying in the world is not going
to turn a losing trade into a winning one.
When you are wrong 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 their
strategy. Maybe for a week they will trade according to one set of rules
and the next use something entirely different.
This flying by the seat of the pants always ends up backfiring. This is
because the trader can never be certain what is working and what is not.
You must never deviate from your methodology once you start. As long as it
is a good one statistically there is absolutely no reason to change it.
The way to make money from it is to trade it over and over again to
exploit the edge it gives you.
One thing to also be aware of is that a trader is most vulnerable to
switching approaches after a few loses. So, pay special attention at these
times.
7. Not knowing how to get out of a losing trade.
It’s amazing how many people I have talked to who don’t have any clear
escape plan for getting out of a bad trade. Once again they hope, pray
wish and rationalize their position. As I keep saying the market does not
care what you think. It does what it does and when you are wrong you are
wrong!
The easiest way to keep a bad trade from going really bad is to determine
before you get in, where you will get out. You can use a dollar amount or
at some target point such as the low of the previous 15-minute bar.
***Make sure you don’t get the “stunned deer in the headlights syndrome”.
This is where you see the stock fall to your stop loss point, but you are
unable to take action. Maybe this is due to fear or disbelief that you are
wrong, but unless you get out ASAP you could end up I major financial
trouble!
8. Having an ego.
I have seen a number of individuals enter the trading game that were
extremely successful in other business ventures. Because of this they had
a fairly 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 of bad trades.
Once again, whoever or wherever you came from does not concern the
markets. All the charm, powers of persuasion, number of diplomas on the
wall or business savvy will not budge the market when you are wrong.
9. Falling in love with a stock or trade.
Let me give you an example of what I mean. Back in the spring of 1999 EFAX
was a really hot stock. I waited to buy it on a dip and did so at
$19/share. It started to move up strongly and life was great!
After a while though, it started to come back to my entry point and then
below it. Here’s the problem. For some reason I really liked EFAX and sort
of became attached to it. Ultimately I couldn’t let go of it even though I
knew I should. I justified and rationalized why my dear friend should
bounce back, 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 never fall in love, let alone get married to
any stock. It can cost you dearly!
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