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Learn from them, don’t repeat them! There are two types of mistakes:
1. Mistakes you have made
2. Mistakes somebody else has made
Human tendency is to link more pain to the mistakes that you have made as opposed to the mistakes that others have made. It is therefore easier to learn from a painful mistake that you have made yourself than learn from a painful mistake that somebody else has made. This is another reason why trading is so hard. Think of the first three to four years of your trading career as an opportunity to learn from your mistakes. The more you mistakes you make initially, the more you will learn – but only if you consider them as learning experiences as opposed to events that you beat yourself up over!
The less painful way to learn is, as mentioned, from the experience of others. The intention of this chapter is to discuss some of the most common mistakes that new traders make when they start and hopefully guide you in the right direction and accelerate your development.
Common Trader Mistakes
1. Trading without training is a recipe for disaster. It takes many years for a doctor or other healthcare professional to learn their craft; so what makes a trader so different? Trading is a profession, and as with all professions there is an education that is needed to ensure that you know what you are doing. It does not take a simple weekend or a reading a book to become fluent – it takes many years of hands on experience. Training takes time and as such, do not be impatient otherwise the market will certainly punish you.
2. “I want to make 10,000% a year – that isn’t unreasonable is it?” Many expert investment fund managers barely make more than 20-30% a year (and many even make a loss). This should indicate to the new trader not to overestimate their return potential. In general, do not consider yourself too much with the return on investment in the first 3-4 years. Use this time to finalise your plan and develop good trading habits – the profits will then follow automatically.
3. The trading plan is the essential element of any good trader. The plan is there to instruct you what to do, when to do it and how much to do it with! When you by a do-it-yourself bookshelf, you normally have a blueprint on how to assemble it. Think of the trading plan as your blue print to instruct you how to trade. Unless a plan is written down, it is useless. New traders often enter very volatile markets without much consideration to the consequences because they do not have a plan that tells them not to do so. A plan will make you trade consistently and help you to minimise your losses while magnifying your gains.
4. Trading is generally a very lonely experience and many traders find it difficult to improve their skills as a result of it. If, for example, you wanted to learn a new language, you would normally go to a class and learn from somebody more experienced. In a similar manner, if you wanted to improve your trading skills, you would find a coach who would be able to help you in trading. Coaches are necessary to help you realise where you are going wrong and to help you improve your performance. $100 spent on improving yourself through a coach is much better than losing $100 in a bad trade in the markets. There may also be organisations that you can join that will bring you into contact with like minded individuals to discuss concepts and bounce off ideas – such as the Society for Technical Analysts or other local investment clubs.
5. If you are looking for the perfect system that will always get you in and out of a trade at the right time and not get you into any losing trades, then unfortunately, you are on a fruitless quest. The market is far to complicated to predict with absolute certainty whether a trade will be profitable or not. Much time and money can be wasted looking for this “holy grail” system. The simple answer has been state all along; get out of a trade early if it is going against you and let your profitable trades run. In other words, as described in previous chapters, your gains will more than cover for your losses.
6. Plan the trade before you enter it – and know when to close the trade. You may have experienced a time when, driving at night, you are approaching an animal at great speed in your car. The animal would normally run to get out of the way, but there are times when the animal would be paralyzed with fear – quite literally, the animal is unable to move because it is so scared! A similar reaction can occur in the markets.
David quoted extensively in 'Smart Investor' One of David's published articles Includes an in-depth chapter with David An interview with David
Example
A trade is going 30 points against you and you think that you should wait a few more points to see if it goes up. It doesn’t, and heads towards 40 points against you. Again, you rationalise and wait for a move up. It does not happen, and a bad piece of news hurtles your stock more than 70 points against you …. what do you do? A natural human reaction here is to be paralysed with fear – literally not being able to close the trade like you know you should because you are so frightened to take the loss. In this case, a further bad piece of news hurls the stock even lower to 90 points against you. This time, you have had enough and close the trade at a loss of 90 points. This is very disappointing as you should have got out of the trade at 30-40 points loss but your fear made you lose even more!
The way to get over this reaction is to have a plan to exit the stock even before you enter the trade. By placing stop losses, you know exactly when you will leave the trade if it goes in the opposite direction.
In a similar manner to the example above, it is human instinct to take your profits very quickly and not let the trade have time to develop. The emotion is one of greed where the trader feels that the profit is theirs and does not want to give it up. This may cause the trader to take the profit too quickly and not allow the profitable trades to compensate for the losing trades. The way to deal with this scenario is to have a target in mind based on the characteristics of the stock in the same way you plan your stop loss.
A trader should always go into a trade with a predefined stop loss and a target that they plan to exit the trade at.
Summary
Trading is not an easy profession, but it is one that can give you great rewards. Avoid these common errors, create a simple, well-designed trading system, and learn your market. If you take the time to study the market, and learn from other's mistakes as well as your own, you will become a successful trader.
Last Trading Article: Learning To Lose Like An Expert
Next Trading Article: Trading Vs. Gambling - Sneaky Tips For Beating Stock Market Odds
Nicolas Darvas Feb 5: Trading and Intervention Ways This Moves the Forex Market (By Nicolas Darvas) Jan 26: Three Main Characteristics of the Forex Market (By Nicolas Darvas) PRICES UP ON (Stock Market News) TAIPEI STOCK MARKET Market News - U.S. Stocks Rally After Fed Decision; Boeing Lifts Dow Average Jan 23: The World Makes the Forex Market Go Round (By Nicolas Darvas)
1. Mistakes you have made
2. Mistakes somebody else has made
Human tendency is to link more pain to the mistakes that you have made as opposed to the mistakes that others have made. It is therefore easier to learn from a painful mistake that you have made yourself than learn from a painful mistake that somebody else has made. This is another reason why trading is so hard. Think of the first three to four years of your trading career as an opportunity to learn from your mistakes. The more you mistakes you make initially, the more you will learn – but only if you consider them as learning experiences as opposed to events that you beat yourself up over!
The less painful way to learn is, as mentioned, from the experience of others. The intention of this chapter is to discuss some of the most common mistakes that new traders make when they start and hopefully guide you in the right direction and accelerate your development.
Common Trader Mistakes
1. Trading without training is a recipe for disaster. It takes many years for a doctor or other healthcare professional to learn their craft; so what makes a trader so different? Trading is a profession, and as with all professions there is an education that is needed to ensure that you know what you are doing. It does not take a simple weekend or a reading a book to become fluent – it takes many years of hands on experience. Training takes time and as such, do not be impatient otherwise the market will certainly punish you.
2. “I want to make 10,000% a year – that isn’t unreasonable is it?” Many expert investment fund managers barely make more than 20-30% a year (and many even make a loss). This should indicate to the new trader not to overestimate their return potential. In general, do not consider yourself too much with the return on investment in the first 3-4 years. Use this time to finalise your plan and develop good trading habits – the profits will then follow automatically.
3. The trading plan is the essential element of any good trader. The plan is there to instruct you what to do, when to do it and how much to do it with! When you by a do-it-yourself bookshelf, you normally have a blueprint on how to assemble it. Think of the trading plan as your blue print to instruct you how to trade. Unless a plan is written down, it is useless. New traders often enter very volatile markets without much consideration to the consequences because they do not have a plan that tells them not to do so. A plan will make you trade consistently and help you to minimise your losses while magnifying your gains.
4. Trading is generally a very lonely experience and many traders find it difficult to improve their skills as a result of it. If, for example, you wanted to learn a new language, you would normally go to a class and learn from somebody more experienced. In a similar manner, if you wanted to improve your trading skills, you would find a coach who would be able to help you in trading. Coaches are necessary to help you realise where you are going wrong and to help you improve your performance. $100 spent on improving yourself through a coach is much better than losing $100 in a bad trade in the markets. There may also be organisations that you can join that will bring you into contact with like minded individuals to discuss concepts and bounce off ideas – such as the Society for Technical Analysts or other local investment clubs.
5. If you are looking for the perfect system that will always get you in and out of a trade at the right time and not get you into any losing trades, then unfortunately, you are on a fruitless quest. The market is far to complicated to predict with absolute certainty whether a trade will be profitable or not. Much time and money can be wasted looking for this “holy grail” system. The simple answer has been state all along; get out of a trade early if it is going against you and let your profitable trades run. In other words, as described in previous chapters, your gains will more than cover for your losses.
6. Plan the trade before you enter it – and know when to close the trade. You may have experienced a time when, driving at night, you are approaching an animal at great speed in your car. The animal would normally run to get out of the way, but there are times when the animal would be paralyzed with fear – quite literally, the animal is unable to move because it is so scared! A similar reaction can occur in the markets.
David quoted extensively in 'Smart Investor' One of David's published articles Includes an in-depth chapter with David An interview with David
Example
A trade is going 30 points against you and you think that you should wait a few more points to see if it goes up. It doesn’t, and heads towards 40 points against you. Again, you rationalise and wait for a move up. It does not happen, and a bad piece of news hurtles your stock more than 70 points against you …. what do you do? A natural human reaction here is to be paralysed with fear – literally not being able to close the trade like you know you should because you are so frightened to take the loss. In this case, a further bad piece of news hurls the stock even lower to 90 points against you. This time, you have had enough and close the trade at a loss of 90 points. This is very disappointing as you should have got out of the trade at 30-40 points loss but your fear made you lose even more!
The way to get over this reaction is to have a plan to exit the stock even before you enter the trade. By placing stop losses, you know exactly when you will leave the trade if it goes in the opposite direction.
In a similar manner to the example above, it is human instinct to take your profits very quickly and not let the trade have time to develop. The emotion is one of greed where the trader feels that the profit is theirs and does not want to give it up. This may cause the trader to take the profit too quickly and not allow the profitable trades to compensate for the losing trades. The way to deal with this scenario is to have a target in mind based on the characteristics of the stock in the same way you plan your stop loss.
A trader should always go into a trade with a predefined stop loss and a target that they plan to exit the trade at.
Summary
Trading is not an easy profession, but it is one that can give you great rewards. Avoid these common errors, create a simple, well-designed trading system, and learn your market. If you take the time to study the market, and learn from other's mistakes as well as your own, you will become a successful trader.
Last Trading Article: Learning To Lose Like An Expert
Next Trading Article: Trading Vs. Gambling - Sneaky Tips For Beating Stock Market Odds
Nicolas Darvas Feb 5: Trading and Intervention Ways This Moves the Forex Market (By Nicolas Darvas) Jan 26: Three Main Characteristics of the Forex Market (By Nicolas Darvas) PRICES UP ON (Stock Market News) TAIPEI STOCK MARKET Market News - U.S. Stocks Rally After Fed Decision; Boeing Lifts Dow Average Jan 23: The World Makes the Forex Market Go Round (By Nicolas Darvas)
