- Lack of homework on what works.
- Inability to manage stress.
- Allowing big losses in your trading account,
- Quitting when they learn trading isn’t easy money.
- Inability to trade volatile markets.
- Inability to emotionally manage equity curves.
- Trading without a positive expectancy model.
- Never committing to one trading strategy.
- Trading based on opinions.
- Not managing position sizing.
- Not managing the risk of ruin.
- Over thinking their trades.
- Reactive trading decisions based on internalizing emotions.
- Trading with leverage without understanding the risks.
- Over trading.
- Trading with an account too small.
- Trading without a plan.
- Trading without stop losses.
- Not understanding what it takes mentally to be a trader.
- Setting stops in obvious places.
- Having only small winners.
- Selling short what looks expensive.
- A lack of discipline.
Archives of “Dot-com” tag
rssTen questions to ask yourself before every trade
Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
- What is my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the trigger to trade?
- How will I exit with a profit? A price target or trailing stop?
- At what price will I know that I was wrong? Where is my stop loss based on the position size?
- Will I be able to admit I was wrong and exit the trade if my stop is hit, or will my ego make me hold and hope?
- Is the risk small enough that I can emotionally handle the loss without blaming the market?
- Can I really risk this money or do I need it for upcoming bills? Trade with risk capital not living expenses.
- Am I committed to staying disciplined and following my trading plan on the trade?
I believe the answers to these questions will determine your success in any trade more than anything else.
7 Basic Truths of Trading
- Well-defined objectives. Are you trying to beat a certain return hurdle, like inflation or an index? Are you trying to generate 5% or 50% returns per year? You have to understand what you are trying to do and then bend your investment process around it. The other way around isn’t possible.
- An understanding of the markets that you will be operating in. Stick to what you know. Narrow your focus so as to make the most of your efforts. You need to know everything about the markets where you’re taking positions.
- A clearly defined methodology for getting into and out of positions. This includes which indicators, news items, fundamental data points you look at and when you take action. This is your checklist—you should have it so well defined that you can be sure of the exact steps along the way. You need a game plan so that you stay consistent and disciplined and don’t get flustered under pressure. It should become automatic and engrained.
- This methodology must utilize your strengths and skills and suit your personality. A cerebral, research-driven economist should put that to work, instead of becoming a swing trader based on technical analysis. An adrenaline-fueled athlete should be an intraday trader, not be a long-term trend follower. Remember, every successful trader has a methodology of their own which plays to their strengths and their personality.
- This methodology has a positive statistical expectancy– the gains from winners more than outweigh the losses on losing trades. Use your own statistics and the Kelly Formula for a rough guide as to whether or not you have positive statistical expectancy. On average you want to expect to win on an individual trade, meaning that your expected wins outweigh your prospective losses. That doesn’t guarantee that you will actually profit on each trade, it just means that over a sufficiently large quantity of trades, you will come out ahead.
- A well-stated risk management policy for when you get out of losing positions and how you manage risk overall. Cut losers. Let winners ride. Many people have tried to overthink this rule and ended up losing as a result. Furthermore, you never want to put yourself in a position where you can blow up, so you need to be thinking how you can avoid taking excessive risk in the first place. Just remember Warren Buffett’s Two Rules:A framework for sizing positions. This is related to risk management— obviously, you don’t want to take a position that’s over a certain size, ever. But you may also want to size positions according to certain specific critieria, such as your conviction in the position or volatility in the market. Or they could all be the same size. Nonetheless, your methodology has to be able to address it and come up with a well-reasoned answer.
- Never Lose Money.
- Never Forget Rule #1.
- A framework for sizing positions. This is related to risk management— obviously, you don’t want to take a position that’s over a certain size, ever. But you may also want to size positions according to certain specific critieria, such as your conviction in the position or volatility in the market. Or they could all be the same size. Nonetheless, your methodology has to be able to address it and come up with a well-reasoned answer.