It takes couple of years to understand what is required to become a good trader. Thanks to books, and personal experience. Those who do not learn from the past are condemned to repeat it"
Mistake 1 - I am a trader, so I should trade
This is one mistake I am most guilty of. The good news is that I am improving, but I am still not there where I should be. Let me share a story to explain my point - There was a fruit vendor who used to sell fruits from a small shop. He was happy selling 1 kg, 2 kg fruits to his customers. One day in the morning, a customer came to his shop, and said he wanted to buy all the fruits in his shop. The vendor refused. Customer was surprised and he asked the reason. Vendor replied - "if he sells all his fruits to him, then what will he do all day". This may sound funny, but that's exactly what we do when we take small profits and don't let our profits run. The reason we take small profits is so that we can trade again. I would have made fortune if I would have just followed this rule. We sometimes feel compelled to trade, and end up making losing trades. Winning is all about waiting for good trades to develop, and then riding those trades. As a trader, I am paid to wait for the best opportunities. Hence, I resolve to trade less - easier said than done.
Mistake 2 - Tendency to chase performance
As a trader, there is a tendency to chase the stock of the day. That's another big reason for my under performance. In order to succeed in trading - focus is very important. I have found that most of my winning trades have come in same set of stocks. The reasoning is simple - you can follow only few stocks well. I have also found that there are many stocks which are just not suitable for trading. They move one day, and then they become quiet, liquidity dries out. I call them sick stocks. We should never try to trade them. The best approach "Select few stocks that are expected to perform well and then follow them rigorously". Liquidity should be the number one criteria for selecting such stocks.
Mistake 3 - Trading on Opinion/news
I have completely stopped trading on news/opinion. So, I can say this is one mistake I have rectified completely. Lot of times, stocks behave in a weird fashion. Earlier, as a trader, I used to have a tendency to jump on to the stock on release of any good news expecting that stock will zoom - only to find to my disbelief that market thinks otherwise. I have lost some big time on sticking to my opinion this way. Lesson - Market reaction to news is what that matters, not your reaction to news. New based trades are best avoid.
Mistake 4 - Getting Influenced by so-called experts
Trading is a very lonely job; and its best done that way. Trading is management of emotions, and any activity that influences your emotions should be complete No No. Also remember, when your money is on line, its very easy to get influenced. One major influence comes from so-called experts on Television channels. This world is full of mediocre people; and I have seen lot of them giving advice on television channels. I am not painting everybody with the same brush. They may be successful, but lot of times, I have found them talking absolute non sense on TV. Sometimes, no lot of times, they can scare you out of good trades or compel you in bad trades. The exposure to news stations and chat rooms bring lot of subjectivity in the trading decisions. If you feel the need to get connected to TV for news, use the "mute feature" of your remote while trading. Chat rooms are also best avoid. Remember, in trading, opinions don't count, then why listen them. I only rely on what market tells me. Being a technical analyst, it means price on the screen.
Mistake 5 - Not Admitting losses early
One big bad trade can ruin all your good work in one shot. I have been guilty of this mistake lot of times, but I am satisfied on the progress I have made on this front. You must have all heard this famous rule - "Never Lose Money". Well, I cannot say this about trading. Losses in trading are reality, as they are the result of taking risks. If you are not making loss making trades, you are not trading or you are lying. The problem is not the loss making trades, but the magnitude of loss making trades. Stop Loss is more sacrosanct than target. Remember, you don't make money on winning trades. You make money by not losing it.
Summing Up: There is very thin line between gambling and trading. It all depend on us what we want to pursue, as the result depends on our pursuit. Trading is a business of probability and uncertainty - and hence discipline is the most important trait for success. Here, a small but highly probable profitable trade is more desirable than a big low probable profitable trade. So, here's my new trading resolution -
Trade Less (Be Patient)
Trade high probable profitable trade
Accept Losses early
Mistake 1 - I am a trader, so I should trade
This is one mistake I am most guilty of. The good news is that I am improving, but I am still not there where I should be. Let me share a story to explain my point - There was a fruit vendor who used to sell fruits from a small shop. He was happy selling 1 kg, 2 kg fruits to his customers. One day in the morning, a customer came to his shop, and said he wanted to buy all the fruits in his shop. The vendor refused. Customer was surprised and he asked the reason. Vendor replied - "if he sells all his fruits to him, then what will he do all day". This may sound funny, but that's exactly what we do when we take small profits and don't let our profits run. The reason we take small profits is so that we can trade again. I would have made fortune if I would have just followed this rule. We sometimes feel compelled to trade, and end up making losing trades. Winning is all about waiting for good trades to develop, and then riding those trades. As a trader, I am paid to wait for the best opportunities. Hence, I resolve to trade less - easier said than done.
Mistake 2 - Tendency to chase performance
As a trader, there is a tendency to chase the stock of the day. That's another big reason for my under performance. In order to succeed in trading - focus is very important. I have found that most of my winning trades have come in same set of stocks. The reasoning is simple - you can follow only few stocks well. I have also found that there are many stocks which are just not suitable for trading. They move one day, and then they become quiet, liquidity dries out. I call them sick stocks. We should never try to trade them. The best approach "Select few stocks that are expected to perform well and then follow them rigorously". Liquidity should be the number one criteria for selecting such stocks.
Mistake 3 - Trading on Opinion/news
I have completely stopped trading on news/opinion. So, I can say this is one mistake I have rectified completely. Lot of times, stocks behave in a weird fashion. Earlier, as a trader, I used to have a tendency to jump on to the stock on release of any good news expecting that stock will zoom - only to find to my disbelief that market thinks otherwise. I have lost some big time on sticking to my opinion this way. Lesson - Market reaction to news is what that matters, not your reaction to news. New based trades are best avoid.
Mistake 4 - Getting Influenced by so-called experts
Trading is a very lonely job; and its best done that way. Trading is management of emotions, and any activity that influences your emotions should be complete No No. Also remember, when your money is on line, its very easy to get influenced. One major influence comes from so-called experts on Television channels. This world is full of mediocre people; and I have seen lot of them giving advice on television channels. I am not painting everybody with the same brush. They may be successful, but lot of times, I have found them talking absolute non sense on TV. Sometimes, no lot of times, they can scare you out of good trades or compel you in bad trades. The exposure to news stations and chat rooms bring lot of subjectivity in the trading decisions. If you feel the need to get connected to TV for news, use the "mute feature" of your remote while trading. Chat rooms are also best avoid. Remember, in trading, opinions don't count, then why listen them. I only rely on what market tells me. Being a technical analyst, it means price on the screen.
Mistake 5 - Not Admitting losses early
One big bad trade can ruin all your good work in one shot. I have been guilty of this mistake lot of times, but I am satisfied on the progress I have made on this front. You must have all heard this famous rule - "Never Lose Money". Well, I cannot say this about trading. Losses in trading are reality, as they are the result of taking risks. If you are not making loss making trades, you are not trading or you are lying. The problem is not the loss making trades, but the magnitude of loss making trades. Stop Loss is more sacrosanct than target. Remember, you don't make money on winning trades. You make money by not losing it.
Summing Up: There is very thin line between gambling and trading. It all depend on us what we want to pursue, as the result depends on our pursuit. Trading is a business of probability and uncertainty - and hence discipline is the most important trait for success. Here, a small but highly probable profitable trade is more desirable than a big low probable profitable trade. So, here's my new trading resolution -
Trade Less (Be Patient)
Trade high probable profitable trade
Accept Losses early