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9 Deadly Trading Mistakes!
Below are 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.
One of the biggest obstacles to successful trading is using money you can’t afford to lose. An example is money that is supposed to be used to pay your mortgage, bills, or your child’s college tuition. This is sometimes called “scared money trading” and for very good reason. Ultimately what happens is that if someone knows in the back of their mind that they are risking the rent, they trade in fear and emotion over logic and no emotion.
If you are in this situation, I strongly recommend that you stop trading until you have earned enough to put in an account that you can actually afford to lose without major financial setbacks. You can start with as little as $2000 and earn with stocks under $30.
2. The “certain” demand.
We all need to make sure that the trade we want to make is going to be a good one. That is why we look for signs that confirm entry. This can take many forms, such as… Tuning into CNBC or the Wall Street Journal for news that our stock is on the move, or waiting a few extra days to make sure the stock is really flying and just not on a fake outburst. Other traders get testimonials from friends, family or the broker. Others wait until ten technical indicators line up and give a “green light”.
These are fine up to a point, however the big mistake to avoid is taking so much time to let the trade take off without you. Interestingly, what happens as a result of waiting too long is that it actually increases your risk. This is because as a stock moves higher and higher, there are fewer buyers left in the market and it may crash until more buyers intervene. It’s like a game of musical chairs; eventually someone is caught without a chair.
Traders who wait and wait to make sure are usually the traders who buy the top mark before the stock sells off. They then beat themselves up and think they picked the wrong stock. It probably 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 trade. All we can do is take a very educated risk along with the leap of faith!
3. Spending your profits before you earn them.
There is nothing more exciting than starting a business that explodes and puts you in a highly profitable position. However, this can cause serious problems because this type of trading puts you in an extremely euphoric state and leads you to daydream about the huge profits still to come. You say, “Wow, in two days I’m up 15%; in a week I’ll be up 50% and probably double my money in no time!” Then the next thing is deciding which cool new car you’re going to buy, or maybe telling your boss he can stick it… Well, you get it!
The real problem comes when you get caught up in daydreaming and expectations. This causes you to not be ready to exit as the market sells out and eats away your profits because you have convinced yourself of the final outcome and are in denial about the reality of the situation.
The simple remedy for this is to know where and how you will take your profits once you enter the trade. Also, keep in mind that the market will only go up as far as it wants, not how high you think it should go.
4. Forming an opinion.
I’m here to tell you, the market doesn’t care about you or your opinion. Even if they are based on thorough research or a “Wall Street Guru” it doesn’t matter!
Your view of the long-term market direction may be correct, but that doesn’t mean things can’t move against it in the short term. Remember that there are tens of thousands of traders who also have an opinion. All of these different opinions are what can cause big price swings on any given day or week, regardless of your outlook
5. Three 4 letter words that will kill you! HOPE—WISH—PRAY
If you ever find yourself doing one or more of the above in a trade, you are in big trouble! Like I said, the market doesn’t care. All the hoping, wishing and praying in the world won’t turn a losing business into a winning one.
If you’re wrong, use a simple 4-letter word to correct the situation – SELL!
6. You don’t stick to your plan
A big source of trouble arises when a trader starts to deviate from his strategy. One week they might be trading with one set of rules, and the next they might be using something completely different.
This flying by the seat of the pants always backfires. This is because a 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 good statistically, there’s no reason to change it. You can make money from it by trading it over and over to take advantage of it.
One more thing to be aware of is that the trader is most vulnerable to change approach after a few losses. Therefore, pay special attention at this time.
7. You don’t know how to get out of a losing business.
It’s amazing how many people I’ve talked to who don’t have a clear escape plan to get out of a bad deal. Again, they hope, pray and rationalize their position. As I say, the market doesn’t care what you think. It does what it does, and if you’re wrong, you’re wrong!
The easiest way to prevent a bad trade from turning sour is to determine where you will exit before you enter. You can use a dollar amount or some kind of target, such as the low of the previous 15-minute bar.
*** Be careful not to get the “startled deer in the headlights syndrome”. Here you see the stock falling to the stop loss, but you cannot act. It may be due to fear or disbelief that you are wrong, but if you don’t get out soon, you could be in serious financial trouble!
8. Having an ego.
I have seen many individuals enter the trading game who have been extremely successful in other business ventures. Because of this, they had rather large egos and believed that they could not fail. Their ego became their downfall because they couldn’t help but be wrong and refused to bail them out of bad deals.
Again, who you are or where you come from is not about the markets. All the charm, persuasion, degrees on the wall or business savvy won’t move the market if you’re 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 was waiting to buy it and did so at $19/share. It started going strong and life was great!
After a while, though, it started coming back up to and then below my entry point. Here’s the problem. For some reason, I really liked EFAX and somehow got attached to it. In the end, I couldn’t let go, even though I knew I should. I gave reasons and rationalized why my dear friend should bounce back, but he never did. I finally had to end my love affair when the stock hit $9. (Ouch!)
The moral of this story is never fall in love let alone marry any stock. It can cost 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 will 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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