THE SEVEN DEADLY SINS OF TRADING .........................
1. Failing To Cut Losses Short.
Traders must accept the fact that losses are, and will always be, a part of the trading environment. This is one of the most difficult facts for most people to grasp. Regardless of how cautious one may try to be, you will incur losses. Successful trading is determined by how well we manage our losses, not by how well we avoid them. Professional traders learn how to keep losses small. Take care of keeping your losses small and the winners will take care of themselves. Losses are like a cancer. All large losses usually start off small. That's where controlling it or cutting it out causes little or no pain. Losses are a disease, treat them early. Nip them in the bud.
2. Dollar Counting.
While profitability is, and certainly should be, the primary objective of trading, traders must work at forgetting their profits. Constantly monitoring profits increases fear and leads to knee-jerk reactions and quick responses that lack intelligence and reason. Instead, focus on technique. "Am I entering the trade properly?" "Is my stop loss properly set?" "Are my objectives reasonably set and what are they?" Good technique will lead to good profits.
3. Switching Time Frames.
There are four dominant time frames in which a market player can act; microterm, short term, intermediate term and long term. For our purposes, microterm will consist of seconds to hours. The short term encompasses 2 days to 2 weeks. The intermediate term covers weeks to months, and the long term involves months to years. One of the biggest errors that traders make is buying in one time frame and selling in another. Switching time frames is really an act of cowardice in disguise. It helps to temporarily escape the pain of making a decision. Most traders switch time frames to camouflage their losses from weak planning and lull themselves into a state of denial, creating a false sense of hope. If you enter in one time frame, be sure to construct your exits in the same time frame, whether it be to cut your losses short or protect profits already gained. You can adjust your stops as long as you stay in the same time frame.
4. Needing To Know More.
One of the biggest psychological maladies in the game of trading, is the fear of pulling the trigger. It is natural for us to want to be cautious before we act, to be extra sure. This can be caused by a fear of losing or because recent losses are causing us to second guess ourselves. The brass ring goes to those who can act intelligently without the need to know more. The need to know more promotes inaction at a time when action is required. The need to know more perpetually keeps traders on the wrong side of the trade. Can the 200 day moving average stop the stock from falling? Maybe. Maybe not. We are odds players, not fortune tellers. If you don't know how to play the odds, you can't "consistently" beat the market.
5. Becoming Too Complacent.
When you have a winning streak, you must do everything in your power to keep your profits and maintain the same intelligent mind set that helped produce those gains. When everything is right, you must increase the level of your caution because you will learn that your greatest failures will come on the heels of your greatest success. Even a professional poker player breaks from the table to count his chips from time to time. In the same way that batting slumps follow hitting streaks in baseball, big losses often follow winning steaks in trading. Many traders won't understand this because they fail to realize that by the time they've won for a lengthy period of time, the favorable market environment that they were so adeptly playing is close to taking on a different character.
6. Winning The Wrong Way.
Many traders do not realize that it's possible to make money in the market the wrong way. They may have failed to adhere to protective stops on a certain position, and by doing so actually end up making money on the play. These traders may feel pleased that the "end result" turned out profitable but, they will have gotten a false sense of success and the market will ensure that they give back this unearned profit sooner or later. Making money incorrectly reinforces bad habits and irresponsible actions. The wrong act, repeatedly committed, will eventually be a sloppy trader's demise. Stay debt free. Make sure you are winning the right way.
7. Rationalizing.
If you ever hope to approach the market with intelligence, planning each one of your trades is an absolute must. Most losing traders are flying by the seat of their pants, without any knowledge of how to even construct a trading plan. However, planning your trade and then failing to trade your plan is a greater crime. Those who know what to do and then fail to do it are the least worthy of that knowledge, and the market typically sees to it that they get their reward: LOSSES. Rationalizing is behind this and the other deadly sins. Because most people tend to be overly optimistic by nature, they have a hard time bringing closure to any event that will leave them with a loss and/or pain. So instead, they begin a process of rationalization. This process of talking one's self out of a correct action eventually winds up taking the trader completely out of the game.
Some of the signs of rationalizing are asking "Why" a stock is acting a certain way instead of sticking to your plan. Checking the news to postpone an action that was planned. Changing time frames and thinking "maybe" the next level will support your trade.
Once a trader has spotted the signs of rationalization, the only appropriate action is to exit the trade. If you find it difficult to exit the trade, then sell half of your position. In short, if you are trying to find a reason to stay in a position, it is obvious no reason is apparent. Searching for a reason means you don't have one. And a trader who's in a stock without a firm reason will be a losing trader.
Source:
Tools And Tactics For The Master Day Trader |
