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Five Trading “Don’ts”

  
  Education
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Trading can be complicated to learn. Many traders spend hours every day on their charts, yet still find success elusive. Part of the difficulty can arise when little attention is paid to the mental side of the game. Developing a mental edge is just as important as possessing a technical trading edge. Here are five common mental “wrong steps” that can quickly derail your trading. These can blindside you no matter how good your technical skills. This brief discussion regarding these trading “don’ts” offers an introduction to trading psychology and some sensible solutions:

What Not to Do

  1. Have an opinion. One sure way to find yourself trading against the market is to have a market opinion. Trading with a rigid belief about what the market will do next can limit your ability to see what the market is actually telling you. 
  2. Have someone else’s opinion. Adopting some market guru’s market opinion is actually worse than having your own. Market gurus are notoriously inaccurate in their predictions.  Embracing another’s market judgment prevents you from learning to read the market on your own. Besides, it’s doubtful the guru will be texting you to let you know when his or her opinion has changed.
  3. Make your opinion public. Putting your bias into a chat room or forum thread makes it public. Making something public gives it a psychological life of its own. It’s hard to back off an opinion once you have announced it to others. 
  4. Let your ego get involved. Everyone wants to be right. In trading, learning to accept being wrong and the losses associated with being wrong is a big part of the game. This is no place for big egos.
  5. Ride a loser. Still wanting to be right? Having a bias, making it public, and getting your ego involved will cause you to hold losers far longer than you should.

What to Do

  1. Anticipate. Avoid having an inflexible bias. Identify areas where the market might turn, break out, or continue, and think through what that would look like. Anticipate the alternative ways the market may trade. When you see the market trading as anticipated, you already know what to do.
  2. Keep your own counsel. Avoid gurus. Jesse Livermore viewed trading as a “lone-wolf” business, and it is. Learn to read the market and make your own decisions.
  3. Avoid the forums while trading. Use the good ones as a source of education, but refrain from making your trades public.
  4. Check your ego. Be aware of when you want to be right. Ask yourself, “What is more important, being right or making money?” Then, make the correct decision.
  5. Cut losses short. Use hard stops and be merciless with losing trades. When the market turns against you, exit.

Bunting’s Laws of Investing

  
  Education
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1. Sell stocks of companies that announce huge acquisitions, that overdiversify, or that spend a fortune on a lavish new headquarters.

2. Avoid stocks where management picks fights with analysts (or, by extension, hedge funds). See Overstock.com in 2005; Netflix in 2010.

3. Watch out when executives start selling a lot of stock — regardless of plausible-sounding excuses. Top execs in homebuilders, mortgage underwriters and Wall Street dumped billions before the 2008 crash.

4. “Run a mile” from all stocks in an industry going through a huge investment boom: Massive overcapacity and consequent collapse is inevitable.

5. Steer clear of investing in manufacturing companies. Their industries are usually plagued with extreme cycles of boom and bust, overcapacity and slumps.

6. Pay little attention to economists or market gurus.

7. Mistrust all mathematical trading formulas as well — they invariably fail just when you most need them to work.

8. Look for companies where the insiders are buying lots of stock.

9. Look for companies generating a lot of cash — a great sign of sustained outperformance.

10. Look for companies which have monopolies (or near monopolies), and those which manage to take out their main competitors.

11. Remember you are buying businesses, not just stocks. Pay close attention to the quality of the business, and especially the quality of the management.

12. Look for companies which have earned the trust of consumers, and which have very strong brand names.

20 Ways to Stop Losing Money

  
  Education
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1. Don’t trust the opinions of market gurus. Remember that it’s your money at stake, not theirs. Listen to what they say, then step back and do your own homework.

2. Don’t believe in a company. Trading isn’t investing, so you need to focus on the price action and forget the balance sheets. Leave the American Dream to Warren Buffett.

3. Don’t break your entry and exit rules. You made them for bad trades, just like the one you’re stuck in right now.

4. Don’t try to get even. This isn’t a game of catch-up. Every action you make has to stand on its own merits. Take your losses with detachment and make your next trade with absolute discipline.

5. Don’t trade over your head. If your last name isn’t Kass or Cramer, stop trading like them. Just concentrate on playing the game well, and stop thinking about making money.

6. Don’t seek the Holy Grail. There is no secret trading formula, other than good position choice and solid risk management. So why are you looking for it?

7. Don’t forget your discipline. Anyone can learn the basics of the trading game. Sadly, most of us will fail because of a lack of self-control, not a lack of knowledge.

8. Don’t chase the crowd. Tune out the groupthink and dance to the beat of your own drummer. Get out of the chat rooms and off the stock boards. This is serious business.

9. Don’t trade the obvious. Everyone sees the most perfect-looking patterns, which is why they set up the most painful losses. Simply stated, if it looks too good to be true, it probably is.

10. Don’t ignore the warning signs. Big losses rarely come without warning. Don’t wait for a lifeboat before you abandon a sinking ship.

11. Don’t count your chickens. That delicious profit isn’t yours until you close out the trade. Trail stops, take blind exits and do everything possible to get that money into your pocket.

12. Don’t forget the plan. Remember the reasons you took a trade in the first place, and don’t get blinded by greed or fear when the position finally starts to move.

13. Don’t have a paycheck mentality. You don’t need to get paid every week or every month, as long as you take advantage of the opportunities as they come. Classic wisdom: traders book 80% of their profits on just 20% of the days the market is open for business. (more…)

Five Things to Avoid In Trading

  
  Education
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What Not To Do

 
1.  Have an opinion.  One sure way to find yourself trading against the market is to have a
market bias.  Trading with an opinion about what the market will do next can limit your
ability to see what the market is actually telling you.  
2.  Have worse than having your own.  Market gurus are notoriously inaccurate in their predictions.   s market judgment prevents you from learning to read the market on
your own.opinion has changed.
3.  Make your opinion public.  Putting your bias into a chat room or forum thread makes it
off an opinion once you have announced it to others.
4.  Let your ego get involved.  Everyone wants to be right.  In trading, you have to ask
yourself 
5.  Ride a loser.  Still wanting to be right?  Having a bias, making it public and getting your ego involved will cause you to hold losers far longer than you should. 

What to Do


1.  Anticipate.  Avoid having a bias.  Identify areas where the market might turn or continue
and think through what that would look like.  Anticipate the alternative ways the market may
trade.
2.  Keep your own counsel.  Avoid gurus.  Learn to read the market and make your own
decisions.
3.  Avoid the forums while trading.  Use the good ones as a source of education, but refrain
from making your trades public.
4.  Check your ego.  Be aware of when you want   make the correct decision.
5.  Cut losses short.  Use hard stops.  When the market turns against you, exit. 

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