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. (more…)
Archives of “time is money” tag
rssCommon Mistakes to Avoid while Trading:
- Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
- Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin).
- Average down in price: Placing good money after bad is a loser’s game.
- Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
- Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
- Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision. (more…)
Value of human capital
Engineers and scientists will never make as much money as business executives. Now a rigorous mathematical proof that explains why this is true: Postulate 1: Knowledge is Power. As every engineer knows, Work
———- = Power Since Knowledge = Power, and Time =Money, we have Work
——— = Knowledge Solving for Money, we get: Work
———– = Money Thus, as Knowledge approaches zero, Money approaches infinity regardless of the Work done. |
Trading Mistakes: Avoid at all Costs
Common Mistakes to Avoid while Trading:
- Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
- Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin). (Learn to position size)
- Average down in price: Placing good money after bad is a loser’s game.
- Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
- Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
- Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision.
- Buying 52-week lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom along with weakness and downward momentum. Buy strength and the momentum moving higher.
- Pure Fundamentalist: Technical analysis is a must! Use candlestick charts that show the price, volume and major moving averages – this is all you need, don’t complicate the process.
- Making trading decisions based on taxes: Never buy or sell based on taxes alone.
- Buying based on dividends: Don’t buy based solely on dividends; most growth stocks will never give out dividends
- Buying familiar names: Yesterday’s leaders are not likely to be tomorrow’s stars. Look for solid new companies with great earnings, sales and a product in demand. Don’t buy a stock based on a popular household name.
- Lack of action: Be able to move on a dime. Time is money, don’t procrastinate or hope for something that may never happen.
- Lack of Consistency: Develop a method suited to your personality; stick to it and don’t trade blindly.