1) Not Selling Fast When You Are Wrong.
What I can lose on a given trade is always more important to me than what I can make. Most new traders will make a purchase or initiate a short position, but when the trade turns against them, they immediately forget why they bought or shorted the stock. As a result, they will let “hope” take over as their new strategy. Hope is not a strategy! Take your medicine and accept defeat when you are on the wrong side of a trade. Great traders have tough skin and move on.
The solution for this problem is to use stops. I always use stops when I trade. The percentage you are willing to lose will be a direct by product of your own risk tolerance — but use them always. I use approximately a 2% stop on all my trades (sometimes less).
2) Using Multiple Approaches or Strategies. Many new traders think they have a strategy … until they don’t. They feel they are comfortable with an approach, but at the first sign of failure they stray. Thus, they become aimless and reckless. Before they know it they are trading rumours, chasing stocks, and ultimately blowing up their account (before they have any real success at all).
New traders will “over trade” or do what I call “revenge” trading right after a loser. Revenge doesn’t work in the market and the only person that benefits from over trading is your broker. I have one strategy I use. Is it the only strategy that works? Definitely not. As a matter of fact almost every trader I know uses their own approach. Some strategies are proprietary systems. Some are plain vanilla strategies that are very basic in nature. The point is have a plan and an approach! So, learn one thing and be the best at it. There is way too much “noise” out there in the new and old media. Everyone claims to be a bull or bear market genius. Put the media on mute so you can follow and perfect your plan.
Being a voracious learner is absolutely key. Be a sponge and learn as much as you can. If you are a day trader, use the websites and read the books that will help you become the best. There are some phenomenal trading blogs out there. Most information is a click away.
3) Trading Too Large. I ran a sizable hedge fund and thankfully always beat the indices in good or bad markets. Much of my initiation and experience was baptism by fire. But if a novice trader asked me the one thing he or she should do to get a feel for the market, I would tell them to paper trade or use very small dollar amounts. There is absolutely no substitute for “screen hours.” Tiger Woods hits five hundred to a thousand balls a day, and he is already the best in the world. If trading is truly your passion, then be in front of your trading screen all day. If I miss twenty minutes of trading because I am out of the office, I genuinely feel like I missed the whole day — my rhythm is gone and my edge becomes diminished. You may be able to get away with less screen time if you are a longer term investor. But if your passion is perfecting the short term trading game, you won’t stand a chance. Good luck out there and don’t listen to the pundits.
Source: Joey Fundora