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Lose your money,but keep your discipline.

Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.

Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?
A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.

  1. Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.
  2. Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.
  3. Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.
  4. Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.
  5. Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.
  6. Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.
  7. Diversifying traded markets or stocks before doing the proper research is a mistake.
  8. Trading so big that your emotions interfere with your trading plan is a mistake.
  9. Trading when you are very sick or going through emotional personal problems is a mistake.
  10. Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.

15 Rules for Stock Market Traders-Investors

1. Reward is ALWAYS relative to Risk: If any product or investment sounds like it has lots of upside, it also has lots of risk. (If you can disprove this, there is a Nobel waiting for you).

2. Overly Optimistic Assumptions: Imagine the worst case scenario. How bad is it? Now multiply it by 3X, 5X 10X, 100X. Due to your own flawed wetware, cognitive preferences, and inherent biases, you have a strong disinclination – even an inability — to consider the true, Armageddon-like worst case scenario.

3. Legal Docs protect the preparer (and its firm), not you: Ask yourself this question: How often in the history of modern finance has any huge legal document gone against its drafters? PPMs, Sales agreement, arbitration clauses — firms put these in to protect themselves, not your organization. An investment that requires a 50-100 page legal document means that legal rights accrue to the firms that underwrote the offering, and not you, the investor. Hard stop, next subject.

4. Asymmetrical Information: In all negotiated sales, one party has far more information, knowledge and data about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which person are you?

5. Motivation: What is the motivation of the person selling you any product? Is it the long term stability and financial health of your organization — or their own fees and commissions?

6. Performance: Speaking of long term health: How significantly do the fees, taxes, commissions, etc., impact the performance of this investment vehicle over time?

7. Shareholder obligation: All publicly traded firms (including iBanks) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed to you, the client. Ask yourself: Does this  product benefit the S/Hs, or my organization? (This is acutely important for untested products).

8. Other People’s Money (OPM): When handing money over to someone to manage, understand the difference between self-directed management and OPM. What hidden incentives are there to take more risk than would otherwise exist if you were managing your own assets? (more…)