The 5 Mistakes Every Trader Should Avoid
I have learned a lot of things on my 14 year journey to becoming a trader. There have been a lot of dead ends, restarts and discoveries along the way. One thing I learned quickly was the need for a set of rules to follow. The rules themselves took over a decade to solidify and perfect. It is not an exhaustive or complete list, but one that can prevent you from losing a lot of money and get to profitability quicker.
Studies show only 5% of traders survive past their first year. What makes us special (the 5%)? We are not lucky, “born with it” or different than anyone else. We have learned the rules we need to follow and stick to them through thick and thin.
1. Don’t send good money after bad.
Every trader has taken a loss, and will take many more in the future. The professionals take them sooner and cut ties with the trade then move on to the next setup. The amateur trader will get emotional and sink ‘clean capital’ from their account to try and avenge their current loss. This leads to one thing, a deeper loss, and eventually an account with a zero balance. Tried, tested and true – don’t let it happen to you.
2. Stop “buying the dips”, this is not boxing day shopping.
Purchasing that big screen TV at a 40% discount is something to brag about. But you do not want to adopt the Boxing Day approach to trading. Think about this, if a stock is dropping there is likely a very good reason for that – don’t fight the trend, it is a freight train that respects nothing and nobody, get out of its way. What it used to trade at is irrelevant, what it’s trading at currently is what it is worth. Buying the dips, or dollar cost averaging may work in an index that is well diversified, but it is a terrible idea when it comes time to a single stock. Why? Think about the result of buying the dips on Enron, Nortel, WorldCom, Washington Mutual or Lehman Brothers? They all went belly up, so would have you.
3. Bulls make money. Bears make money. Pigs get slaughtered.
You can be a bull, and a bear, and often you will even switch between the two quite frequently and indiscriminately. However, do not be a greedy pig, you will get slaughtered. Stop trying to juice every ounce from the market. I call this the pineapple approach to trading – chop the top, chop the bottom, enjoy the sweet middle. Focus on identifying high probability trades with low percentage moves. The smaller move you target the better chances you have of being right.
4. The market is never wrong.
Here is a secret, NO ONE actually knows where the market will be in the future. Your perception of what should happen in the market is probably not what will actually happen. Learn to read the signals and analyze what course of action you should take, as opposed to telling the market where it should go. Bad news report caused the market to rally? Don’t hate it, trade it. Amazing news and seeing a drop? Don’t hate it, trade it. The outcome doesn’t have to make sense to make you money. The best part about trading is that even when you are wrong you can make a profit, as long as you catch your mistake and make an adjustment. Think of trading as the ultimate job security. Where else can you be consistently wrong and still have a job?
5. Ditch the books, learn to read the charts instead.
My career as a trader began with this big mistake. I spent hundreds of hours reading books, watching videos, listening to webinars and consuming whatever trading media I could get my hands on. Most new traders over study and under prepare. You are not going for your PhD here, this is an applied art. Start trading in live markets with fake money as soon as possible. The best teacher is experience. Just make sure not to fall victim to the psychotic test – a person who does the same thing and expects different results. Keep learning, doing, changing and adapting to the markets, because they change every day.
A mentor can help you along the way and bust through your plateaus. Who might that mentor be you may be wondering? Me – you can contact me at any time.
If you promise to never break any of the rules above, you are well on your way of getting a membership to the 5% club of traders. It is not easy, and you will break them all a few times in your path to stardom, so don’t beat yourself up, but acknowledge and document the circumstances that led to this lapse in discipline.
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