5 trading mistakes:
1. Too large a position. Almost every trader falls into this trap when they begin trading stocks. When half your trading dollars are tied up in one position, that is not sweat on your brow, those are little drops of blood. Many pros suggest you invest no more than 5% of your portfolio in any one position. The most successful traders I know rarely if ever go for the home run but make substantial livings off everyday singles and doubles.
2. Catching falling knives. While valuation arguments may eventually prove out, trying to catch a bottom can leave you with an investment, tying up valuable dollars that could be turned over and over again while you wait for your bad decision to turn around. There are much better risk/reward opportunities out there, every day.
3. Letting losses run. Who hasn't committed this sin? Taking a loss is part of this game but possibly the most difficult aspect to effectively manage. On the one hand, you have to give your position some breathing room, or you will find you have pegged the low for the day, the stock reversed, and you are left gnashing your teeth. There are many mechanical stop-loss concepts available, developed by much better traders than myself. Find one you can live with and use it.
4. Cutting profits. Not quite as serious a mistake as No. 3 on the face of it, but let's examine it. "You'll never go broke taking a profit" is the old maxim. Sounds good, but it's not really true. If you can't control your losses and consistently take 3-4 point losses, and yet take profits of say .35-1.00, well, you can do the math. In the whippy market we have had of late, many traders have happy feet, and the first time there is a downtick, they are gone.
If you have a proper position size, letting profits run is easier. One thing I have learned from RevShark is to gradually build a position in a stock I favor, rather than go all in from the get-go. If a stock exhibits strength, the next time you want to sell, instead consider adding to your position. This need not contradict Rule No. 1 if executed properly.
5. Holding through earnings. I know many traders hold through earnings. These are my five mistakes, and I have been burned enough over the years by holding through earnings in my trading account that I simply don't do it anymore. I will hold in my IRA, where the time frame is months and years rather than days and weeks. If a stock is still strong after earnings, I can always buy it back. Emotion is the trader's enemy, and emotion is seated in the ego. The first four of these mistakes are ego-related. Subjugate your ego, just a bit, and watch your trading improve dramatically. Good Trading." |
