10 common trading mistakes

Austin — Thu, 29 May 2008 08:05:59 +0000

Mistakes are a part of trading. Every trader makes them. But the most successful traders in the world—the ones who make huge profits every year—are the ones who make the least number of mistakes. The following is a list of ten common trading mistakes. Once you’ve learned to avoid these errors, you’ll expand your knowledge of the futures and options markets and increase your chances of making more winning trades.

#1. FOLLOWING THE CROWD

Although it’s been said there’s safety in numbers that statement almost never applies to trading. Successful traders know that it’s better to “lead the pack” than it is to blindly “follow the herd.” Because the biggest profits are made by catching moves before the crowd has a chance to react, it’s important that you form your own opinions and then act on them with total confidence.

#2. REVERSING YOUR POSITION

If your position is wrong, avoid the temptation of making a 180-degree turn. Instead, get out and give your trading a rest before taking another position. Ignore this advice, and you run the risk of being whipsawed—losing as the market moves against you, then losing more when the market turns and goes against you again.

#3. TRYING TO PICK TOPS AND BOTTOMS

The smartest traders always let the market price action prove a top or bottom has been formed before taking an active position. Trying to pinpoint tops and bottoms is a risky business where the possibility of taking a loss far outweighs the potential gain. By exercising patience and waiting for a definite high or low to appear, you’ll increase your odds for making a profit while reducing your risk and stress.

#4. LOSING YOUR COOL

The most successful traders possess personalities that allow them to keep their emotions in check, even when they’re wrong about their position. By remaining objective at all times, you’ll make more intelligent trading decisions and avoid making trades based on anger or revenge. If you have difficulty controlling your emotions, you probably won’t make a very good trader.

#5. WAITING TOO LONG TO PULL THE TRIGGER

Procrastinators make lousy traders. Although one should never act on gut instinct alone, being too cautious or indecisive can be almost as destructive to your trading results. The best traders are the ones who are able to respond quickly and automatically to what they see in the market. Those who do not have the courage and conviction to act on their judgment are better off investing their money some other way.

#6. LETTING LOSSES RUN

Don’t ever be afraid to admit defeat. When you make a mistake, take your lumps, swallow your pride and continue on to the next trade. Before you make a trade, decide where you want to get out if the market goes against you and then stick to your plan no matter what. Even experienced traders sometimes hold losses for too long, hoping the market will turn in their favor. Most times it will continue moving against them, and they’ll end up losing even more.

#7. AVOIDING STOP ORDERS

Placing stop orders is one of the easiest ways to protect you against taking a disastrous loss. Although placing stop orders too tight can put you out of the market quickly, some trading experts recommend that you use them at all times. Using stops is easy discipline, but remember to use discretion when using them. When placed too tightly, stops can take you out of the action before the market has made a significant move.

#8. BEING GREEDY

It’s one of the first things every beginning trader learns: let profits run. But how do you decide how far to let them run? When a trade goes in your favor and you’ve already made a handsome profit, it’s sometimes a good idea to take the money and run. One of the biggest mistakes some traders make is staying in the market for too long hoping for a windfall that will make them rich all at once. Of all the emotions that can affect trading results, greed is the most destructive.

#9. TRADING TOO MANY MARKETS AT ONCE

In futures, those who aspire to be a “Jack of all markets” usually end up being a “master of none.” If you spread yourself too thin by trying to trade too many different markets at once, you won’t have the information and “feel” you need to make good decisions. Most expert traders recommend that you limit your trading to one or two markets. If you do choose to trade several different futures, it’s best to trade groups that move in relation to one another.

#10. NOT DOING YOUR HOMEWORK

Although it can be tremendously rewarding, trading also is quite demanding. Anyone who tells you different hasn’t been trading for very long. The best traders are the ones who have made a commitment to do what it takes to become a success. They’re willing to study charts or learn new trading methods so they’re always ready for what the market throws their way. Once you’ve made that commitment yourself, you’ve taken your first step toward trading success.

Source: InvestorDost

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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12 rules that can save you further losses

Austin — Wed, 28 May 2008 07:35:50 +0000

Photo by tarotastic

On Risk

Worry is not a sickness but a sign of health if you are not worried, you are not risking enough.
Always play for meaningful stakes if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
Resist the allure of diversification.

On Greed

Always take your profit too soon.
Decide in advance what gain you want from a venture, and when you get it, get out.

On Hope

When the ship starts sinking, don’t pray. Jump.
Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

On Forecasts

Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.
The story of a monkey throwing darts on the stock exchange page of a newspaper, to select the companies to buy, and coming out a winner is too well known to be recited. Recent news from London, further proves the truth, when an untrained chemist’s stock selections, in a widely publicised contest open to all and sundry, registered higher appreciation over several full time highly qualified fund managers’ well researched selections. Human events cannot be predicted by any method by anyone and, hence, don’t trust anybody’s predictions.

On Patterns

Chaos is not dangerous until it starts to look orderly.
Beware the historian’s trap it is based on the age old but entirely unwarranted belief that the orderly repetition of history allows for accurate forecasting in certain situations.
Beware the chartist’s illusion it is characteristic of human minds to perceive links of cause and effect where none exist.
Beware the gambler’s fallacy there’s no such thing as “Today’s my lucky day” or “I’m hot tonight”.

On Mobility

Avoid putting down roots. They impede motion.
Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
Never hesitate to abandon a venture if something more attractive comes into view.

On Intuition

A hunch can be trusted if it can be explained.
Never confuse a hunch with a hope.

On the Occult

If astrology worked, all astrologers would be rich.
A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.

On Optimism & Pessimism

Optimism means expecting the best, but confidence mean knowing how you will handle the worst. Never make a move if you are merely optimistic.

On Consensus

Disregard the majority opinion. It is probably wrong.
Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.

On Stubbornness

If it doesn’t pay off the first time, forget it.
Never try to save a bad investment by “averaging down”.

On Planning

Long range plans engender the dangerous belief that the future is under control. It is important never to take your own long range plans or other people’s seriously.

In essence these axioms point to the benefit of having an investment strategy and sticking to it, regardless of what other investors say or do. If you don’t have an investment strategy, you could do worse than adopt these principles. However, don’t be afraid to add or subtract ones according to what works for you.