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Common Mistakes for losing Money

  
  Education
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Trading is an evolutionary process. Nobody can wake up being a Master Trader. Unfortunately there is no book or magic trick that can turn you into the highly profitable trader. Although the belief and the hope to obtain those skills instantly is still in place.

The statistics say that only the ones with the self-dedication and discipline succeed in this business.

The most common mistakes leading to losses:

-Trading against the market;

-No trade potential;

-No serious buyers or sellers in the stock;

-Wide stop-loss;

-Fear of loss.

Traders should stay calm during the trading, this helps to observe and analyze the situation on the market much better, see some small details and make a competent decision.

Panic, stress or fear, always lead to mistakes.

One of the serious problems in trading is rush and mania to be present on the market all the times, opening positions when there is no potential for a trade or where the market is either flat or going the other direction.

Tips to resolve the mistakes:

1. Always look at the market. If there is no clear picture of the market’s behavior, don’t risk your money.

2. Always look at a trade potential. If you look at the daily charts and see that the daily bars are just 20 cents long, then look for other stocks, where the potential is at least 40 cents.

3. Always look either at the Open Book or Market Maker window and Tape. If you don’t see any order flow on the Tape or the order sizes are small (less than a 1000 shares), then don’t enter the trade.

4. Always know where you are going to place you stop-loss order. If it is more than 10 cents away from your entry point, don’t enter the trade.

5. If you’re just not sure, or if the situation is uncertain, don’t enter the trade.

Following these tips requires some work and changes to our habits. It is not easy at all! We always hear sayings that the trader should be disciplined. What it actually means is changing your old habits and training yourself to have new ones. It is not comfortable, but it brings positive results, which will be noticeable on your month-end P/L report.

2 Hidden Principles of Successful Traders

  
  Education
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1)  The ability to tolerate uncertainty – Suppose you take any particular configuration of price in a market; say, trading x% above or below a Y period moving average.  Then look at what that market does on average over the next Y period.  The odds are great that for any value of x and Y, the market’s directional tendency will be swamped by the variability of price within that next Y period.  What that means is that, on average, the signal to noise ratio for a directional trader is low.  Whatever directional tendency is present is generally not statistically significant and not readily tradeable.  Given such a situation, the modal opinion of any trader should be “I don’t know”.  Uncertainty is itself a view and, in fact, should be one’s base case.  When a trader cannot tolerate uncertainty and needs to manufacture conviction, the result inevitably is overtrading the objective opportunity set.  It is impossible to properly manage risk if you are intolerant of uncertainty.

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Fascinating Insights From Nobel Prize-Winner Robert Shiller

  
Analysis, Education
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On why so many experts missed the 2008 financial crisis: “Experts have always missed big events like this. If you look at the record of statistical forecasting models, they tend to get to the recession when it’s starting to come. A casual observer might start to worry about it. Forecasting it years out, they don’t get; in particular, if you look at the Great Depression of the 1930s, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced and it would come down, but if you look at what they said, did that mean a depression is coming? A decade-long depression? That was never said.”

On short-term thinking: “I think that there’s too much faith in analysis of short-term data. You see some pattern, and you can do a statistical test and prove that will prove that it is significant or passes the smell test to a statistician. But the problem is, the world is always changing. It’s not a stable thing. The underlying human parameters may be stable, but you can see that there is institutional and cultural evolution, and it’s not something that you can quantify.”

11 Things I’ve Learned About Markets

  
  Education
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1. “There is no such thing as easy money”

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

3. It’s bad to try to make money the same way several days in a row

4. Markets that have little liquidity are almost impossible to profit from.

5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

6. The market puts infinitely more emphasis on ephemeral announcements that it should.

7. It is good to go against the trend followers after they have become committed.

8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you’ll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

10. A meme about the relation between today’s events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

11. All higher forms of math and statistics are useless in uncovering regularities.

The Difference: Mediocrity vs. Greatness

  
  Education
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In Trading, the STATISTICS show that smarts, experience, etc. are not the differentiating factor.
The BEST (most successful guys I know and work with) have winning %’s of less than 50%.. actually, the average is between 45-55% but the point is, basically, winning percentages don’t matter – so they might as well be a random event.

 So, what does make a difference?

 

  • CONVICTION in ideas
  • INTERNAL CONFIDENCE
  • TRUSTING YOURSELF
  • GETTING BIG IN TRADES you believe in
  • LETTING WINNERS RUN
  • CUTTING LOSERS QUICKLY
  • SWITCHING DIRECTIONS QUICKLY

 

 These are many of the factors that allow some people to become monster traders over time. It’s not my opinion, just my observations. 

Ten questions to ask yourself before every trade

  
  Education
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  1. 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?

  2. 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?
  3. What is my risk of ruin based on my capital at risk?
  4. Why am I entering the trade here? What is the trigger to trade?
  5. How will I exit with a profit? A price target or trailing stop?
  6. At what price will I know that I was wrong? Where is my stop loss based on the position size?
  7. 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?
  8. Is the risk small enough that I can emotionally handle the loss without blaming the market?
  9. Can I really risk this money or do I need it for upcoming bills? Trade with risk capital not living expenses.
  10. 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.

Our Favorite Non-Investing Books About Investing

  
  Education
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A few people have asked me over the past couple of weeks to share some of my favorite books outside of finance that are applicable to investing. The majority of these books are based on psychology because it plays such an important role in making better investment decisions. Here’s my list:

Mindless Eating: Why We Eat More Than We Think by Brian Wansink
The analogy between your finances and losing weight has been used over and over again throughout the years. It’s a useful analogy because the decisions in both activities are mainly affected by people’s behavior (or a lack of behavioral change). A couple of my favorites stats from this book: (1) People make an average of over 200 food-related decisions each day and (2) It’s estimated that 95% of all people who lose weight on a diet gain it all back.

Influence: The Psychology of Persuasion by Robert Cialdini
This one has been recommended by Charlie Munger on a number of occasions so I finally read it this year. It’s one of the best psychology books I’ve ever read. This book really helps you step into the shoes of the mind of a marketer or sales-person trying to get you interested in their product. These people are masters at getting into people’s heads to get them to act. Cialdini also touches on the social proof theory, which states that most people look to see what others are doing to figure out acceptable behavior. (more…)

Warp Speed or Turtle Speed?

  
  Education
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A lot of statistics are published about the number of traders that are ’successful’ even though we don’t always receive their definition of successful.

Whether it is 70% or 95% of new traders that are said to lose all of their capital in the first 30-60 days, the real question is WHY??

In almost every case that I hear about when a person states that they quit trading because they lost all of their money in the first 30-60 days so they got discouraged and said that trading was not for them, these individuals attempted to move too fast when they started. They had acquired very little, if any, type of training and then jumped into a live account without any direction or plan.

Anyone who steps into the trading world (or any endeavor) without training to acquire the skills needed to approach the new program is setting themselves up for a very challenging situation and generally more failures than successes.

You can approach a new situation in life at warp speed and take the consequences or at the speed of a turtle and build your skills and experience so as to eventually acquire warp speed movement, but with turtle-like results, which is what the turtle always experienced when he raced the rabbit….. Success!!

Qualities of Successful Traders

  
  Education
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Emotional stability. You don’t have to be nuts to trade, but it helps!  That is a joke, of course. Emotional stability is grace under pressure. A successful trader must be able to remain calm in difficult situations. Traders that rank very high on the emotional stability scale have very low anxiety levels, remain calm, relaxed, and have a low suspicion level. They tend to be trusting individuals and are not paranoid. You won’t hear them blame the market makers for forcing the stock to hit their stop and they take responsibility for their actions. Successful traders tend to be well
grounded.
 

Discipline. Successful traders are ones that can follow the rules. They are the guys that drive the speed limit. They tend to be perfectionist and take pride in their work. They like to take a project from start to finish and get joy from completing it successfully. Pilots, trained to follow checklists, tend to make good traders. An impulse oriented individual will have difficulty achieving the discipline to become a successful trader.
 

Intelligence. Bill says that successful traders tend to be intelligent. They need not have the IQ of Einstein but they are above average in intelligence. They tend to be good problem solvers and good with numbers, such as statistics. They understand that trading is based on probability, that not every trade will work as planned.

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