NEVER THROW MORE MONEY AFTER A LOSING POSITION

Never add to a losing position under any circumstances. Throwing more money at a losing trade will burn your capital faster than you can imagine. This is the main contributor that eliminates losing investors from the trading game. The only thing that happens when you buy more of a losing position is that your net worth declines. You hope that it may turn around eventually and your decision to buy will prove fortuitous. For every example of a fortune from an unexpected turnaround, there are ten examples of bleak outcomes.  

 

ALWAYS INVEST ON THE WINNING SIDE

Do not worry about trading on the bullish or bearish side, but always trade on the winning side. This is a brilliant piece of wisdom. Learn to master the art and science of investing on the winning side. You should be willing to change sides immediately when one side has gained the upper hand. You cannot stay rigid in your positions because the market is dynamic. Keep a close eye to see if the facts have changed regarding the company. If the facts have changed, you must change.

 

DO NOT HANG ONTO A LOSING POSITION

Failure to admit you were wrong and holding onto losing positions will cost you money. Watching your capital deplete in front of your eyes is de-motivating and mentally exhausting. However, your mind will be even more exhausted if you hold onto a losing trade. You will get more and more fearful with each passing minute, day and week.

In the meantime, you are missing out on a treasure chest of potentially profitable stocks that are waiting to make you money. Bad decisions are valuable sources of learning to master your trading technique. Cut your losses, adapt your trading strategy to include your new knowledge, and search for stocks that will make you money. In the stock market, time is money; there is no time to watch your stock fall all the way to the bottom.

 

FOLLOW THE TREND

You can never know what price is really low or high. Hence, it is difficult to simply buy low and sell high. It is easier to think of it as buy high and sell higher. If it is a quality growth or value stock, it is inevitable that the stock price will rise inline with earnings. So a ‘high’ is not always a high, since these types of stocks often move steadily above the high, for quiet a while.

With good analysis and interpretation of the facts at hand, you have an idea of the possible trend direction and can act on those assumptions. You can buy higher and you can sell higher on an uptrend. Remember that you do not know how high the high really is, or how low the low really is. This is because it is as high or low as the market wants it to be. When a trend becomes established, it often runs further than the most optimistic or pessimistic expectations.

  

GET USED TO THE UNPREDICTAIBILY OF MARKETS

Trading the markets runs in cycles; some are good experiences and some are bad. This is the nature of trading, and the most you can do about it is; accept it, learn from it and improve your game. The markets are illogical and unpredictable most of the time. They can remain illogical far longer than you have access to capital. The markets are irrational and you must learn to accept and deal with the irrationality. There will be times when your trades will result in losses even though you had wise insights and thorough analysis that backed your decisions.

When you find yourself trading poorly, trade very small until the winds have changed and you are profiting again. There is no rush, and you do not always have to trade. If you are not confident in a stock, sleep on it. There are limitless opportunities out there and tomorrow is another day. Take a step back when you are going through a losing streak and get your mind off trading for a few days.

 

USE BOTH; FUNDAMENTAL & TECHNICAL ANALYSIS

To be a successful trader, you have to use both fundamental and technical analysis to make buy, hold and sell decisions. It is imperative that you understand the economic fundamentals that will drive the stock higher or lower. Tracking and understanding the technicals will tell you how the price is moving, and whether your expectations drawn from the fundamentals are correct. You cannot trade effectively if you do not incorporate both analysis techniques.

There are many rigid and hardcore fundamentalists and technicians who prefer to spend their time debating which technique is better. Do not get caught up in these meaningless arguments. Set your focus on making money and use the best tools from both worlds for your trading decisions. The market fundamentals could indicate that you should be bullish, but the trend according to the technicals is downward; so you will not necessarily buy. Similarly, the fundamentals may be bearish, but the technicals indicate that the stock is on an uptrend; so you will not necessarily sell. Naturally, if the stock’s fundamentals are bullish, and the technicals indicate an uptrend, you will consider buying.

 

KEEP YOUR TRADING SYSTEM SIMPLE

Novice investors assume that the more complex the trading system, the more profits will be made. You will find bright young men and women explain the most complicated and clearly sophisticated trading systems. They have worked hard to learn and nurture these systems, spending huge sums of money and time. History shows that complicated trading systems rarely make money for those who use them.

Complexity creates confusion, especially when making decisions under pressure. Simplicity will help you make decisions swiftly, and to clearly see errors when they are made. Simplicity breeds elegance. Successful traders employ simple trading systems that they understand very well. They draw simple trend lines, they observe and act on simple technical signals using just a few technical indictors, and they react quickly. 

 

UNDERSTAND THE MARKET PSYCHOLOGY

Great traders often say that understanding mass market psychology is often more important than understanding market economics. Markets are, as is often said, the sum total of the wisdom and stupidity of all who trade in them. The dot com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. Markets remain irrational and psychology shapes it.  

 

CONSTANTLY IMPROVE YOUR TRADING METHOD

Your trading plan should always be under continuous improvement. At the end of every trading day, you should spend some time thinking about how you can improve the way you trade. Do more of that which is working and do less of that which is not. This is a simple yet powerful rule. This is an important wisdom to guide you, as you watch and trade the markets.

Always hold true to one rule; Add to a winning trade while cutting back on losing trades. Do more of what works well for you, and stop doing what does not fulfil you, can also be applied to your life. As you are trading, constantly ask yourself: What is working today, and what is not? Then try, to the best of your ability, to do more of that which is working and less of that which is not.

There are no set rules on how much more or how much less you should be adapting your trading strategy. The degree to which you change things must be fine tuned over time, and your trading profits and losses will tell you if you are in the right track. Each day, stand by your own set of trading rules. You will lose some trades, because the losses incurred are inevitable. Cut your losses, accept them, and move onto better opportunities.