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The following are a list of nine things you want
to avoid at all costs. Anyone of them can literally destroy your
financial dreams and goals!
1. Trading with money you can't afford to lose.
One of the greatest obstacles to successful trading is using money that
you really can’t afford to lose. Examples of this would be money that
is supposed to be used to pay the mortgage, bills or your child’s
college tuition. This is sometimes referred to as “trading with scared
money” and there is a very good reason for that. Ultimately what
happens is that when someone knows in the back of their mind that they
are risking the rent money, they trade out of fear and emotion versus
logic and no emotion. If you are in this situation I highly recommend
that you stop trading until you earn enough to put into an account that
you truly can afford to lose without causing major financial setbacks.
You can start with as little as $2000 and trade stocks under $30.
2. The need to be "certain".
We all have the need to make sure that the trade we want to make is
going to be a good one. Therefore we look for signs that will give us a
confirmation to enter. This can come in several forms, for example…
Tuning into CNBC or the Wall Street Journal to give us news that our
stock is on the move or waiting for a couple of extra days to make sure
that the stock is really flying and just not on a false breakout. Other
traders will get opinions from friends, family or broker. Others will
wait for ten technical indicators to line up and give the “green
light”.
All of these are okay to a point, however the big mistake to avoid is
taking so much time that you let the trade take off without you.
Interestingly, what ends up happening as a result of waiting too long
is that you actually increase your risk. This is because as a stock
moves higher and higher there are fewer buyers left in the market and
it can come tumbling down until more buyers step in. It is like a game
of musical chairs; eventually someone gets caught without a chair.
Traders who wait and wait and wait to make extra sure are usually the
ones buying the top tick just before the stocks sells off. They then
beat themselves up thinking they picked the wrong stock. Odds are it
had nothing to do with their selection, just bad timing.
The thing to keep in mind is that there can be no absolute certainty in
any given trade. All we ever can do is take a very educated risk along
with a leap of faith!
3. Spending profits before you make them.
Nothing is more exciting then getting into a trade that blasts off and
puts you into a highly profitable situation. This can cause major
problems however, because this type of trade puts you in a highly
euphoric state and leads to daydreaming about the huge profits still to
come. You say “Wow I’m already up 15% in two days; I’ll be up 50% in a
week and probably double my money in no time!” Then the next thing that
happens is you are deciding on the great new car you are going to buy
or perhaps telling your boss that he can stick it… Well you get the
idea!
The real problem occurs as you get caught up in the daydream and
expectations. This causes you to not be prepared to get out as the
market sells off and eats up your profits because you have convinced
yourself of the eventual outcome and will deny the reality of the
situation.
The simple remedy for this is to know where and how you will take
profits once you enter the trade. Also, realize that the market will
only go up as long as it wants and not how high you think it should go.
4. Forming an opinion.
I’m here to tell you that the market does not give a damn about you or
your opinions. Even if they are based on painstaking research or from a
“Wall Street Guru”, it doesn’t matter!
5. Three 4-letter words that will kill you! HOPE---WISH---PRAY
If you ever find yourself doing one or more of the above while in a
trade then you are in big trouble! As I have already said, the market
doesn’t give a damn. All the hoping, wishing and praying in the world
is not going to turn a losing trade into a winning one.
When you are wrong just use a simple 4-letter word to correct the
situation-SELL!
6. Not sticking to your plan
A big source of trouble arises when a trader starts to deviate from
their strategy. Maybe for a week they will trade according to one set
of rules and the next use something entirely different.
This flying by the seat of the pants always ends up backfiring. This is
because the trader can never be certain what is working and what is
not.
You must never deviate from your methodology once you start. As long as
it is a good one statistically there is absolutely no reason to change
it. The way to make money from it is to trade it over and over again to
exploit the edge it gives you.
One thing to also be aware of is that a trader is most vulnerable to
switching approaches after a few loses. So, pay special attention at
these times.
7. Not knowing how to get out of a losing trade.
It’s amazing how many people I have talked to who don’t have any clear
escape plan for getting out of a bad trade. Once again they hope, pray
wish and rationalize their position. As I keep saying the market does
not care what you think. It does what it does and when you are wrong
you are wrong!
The easiest way to keep a bad trade from going really bad is to
determine before you get in, where you will get out. You can use a
dollar amount or at some target point such as the low of the previous
15-minute bar.
***Make sure you don’t get the “stunned deer in the headlights
syndrome”. This is where you see the stock fall to your stop loss
point, but you are unable to take action. Maybe this is due to fear or
disbelief that you are wrong, but unless you get out ASAP you could end
up I major financial trouble!
8. Having an ego.
I have seen a number of individuals enter the trading game that were
extremely successful in other business ventures. Because of this they
had a fairly big ego and thought they couldn’t fail. Their egos became
their downfall because they couldn’t except that they were wrong and
refused to bail out of bad trades.
Once again, whoever or wherever you came from does not concern the
markets. All the charm, powers of persuasion, number of diplomas on the
wall or business savvy will not budge the market when you are wrong.
9. Falling in love with a stock or trade.
Let me give you an example of what I mean. Back in the spring of 1999
EFAX was a really hot stock. I waited to buy it on a dip and did so at
$19/share. It started to move up strongly and life was great!
After a while though, it started to come back to my entry point and
then below it. Here’s the problem. For some reason I really liked EFAX
and sort of became attached to it. Ultimately I couldn’t let go of it
even though I knew I should. I justified and rationalized why my dear
friend should bounce back, but it never did. I finally had to break off
my love affair when the stock hit $9. (Ouch!)
The moral of this story is never fall in love, let alone get married to
any stock. It can cost you dearly!
About the author:
Mark Crisp
The Momentum Stock Trader
©2005 - All Rights Reserved
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