1. OVERTRADING:
The financial media promotes overtrading. Because if you’re not trading you’re not trying, right? Wrong. They create exciting stories about where markets will move and why. For many investors, the desire to play outweighs the desire to win. They rather medicate their boredom by making trades and hopping on the latest hot trend. The best traders are much less active than you’ve been led to believe. They aim to profit by riding long-term trends that play out over months and years, not minutes and hours. Trading on such short time frames gets you nowhere.
THE BEST TRADERS:
- On average, trade each market only 1-3 times per year
- Do not make predictions, but follow trends
- Do not let short-term volatility shake them out of their positions
- Do not feel the need to trade every day, every week or month; only when they see opportunity
2. GOING AGAINST THE TREND:
We all need a trend to make money. If we buy at price A, then we must sell at a higher price B in order to profit. Betting against trends is not only unnatural, but inherently unprofitable. Surfers do not try to ride waves out to sea. Those that do, wipe out – and look ridiculous. Traders do not make profit by holding long positions in downtrends or short positions in uptrends. In trading, the only thing that matters is price. Our job is to measure it and align with each market’s trend. How we do this doesn’t matter.
3. LETTING LOSSES RUN:
You must have an exit point for every investment you hold. Without one, whether you admit it or not, all of your money is at risk. Ya gotta know when to let it go. This goes for everything in life. If ascertain food doesn’t agree with your stomach, stop eating it. If an exercise gives you pain, stop doing it. If you’re dating a person who makes you miserable, break up with them and move on. When you let losses run, you waste resources – namely, time and money. But you also miss out on other opportunities. Exiting losing investments frees up your capacity to be deployed to new and possibly better opportunities in other markets or stocks
4. CUTTING WINNERS EARLY:
As the old saying goes: “If it ain’t broke, don’t fix it”. Investors are too eager to book gains, especially those that come quickly. Our lizard brain likes being right and feeling smart. When one of our investments shows a profit, our lizard brain wants us to quickly ring the register. This behavior comes at a cost though. Like pulling our flowers before they bloom, cutting winners inhibits us from generating huge gains. If you want big profits, you must hold your winners and let them grow. Investments do not always grow into big winners, but you allow them that chance. One or two big winners can make your year or even your career. You may be tempted to pull a George Costanza and go out on a high note, but George was one of the biggest losers in TV history. Selling your winners keeps your profits small and, thus, from major investing success.
PROFIT-LIMITING TACTICS INCLUDE:
- Selling a position soon after it becomes profitable
- Selling profit targets
- Selling volatility targets
- Selling price targets
5. IGNORING YOUR RISK TOLERANCE:
If you know how much pain you can take, you increase your odds of survival and winning Knowing your pain threshold allows you to grow at your desired speed. If you want to grow fast, you must take on more risk, but with more risk comes higher volatility and larger drawdowns. If you’re OK with this, great! If and when your performance becomes volatile, you won’t abandon your plan. As an investor, you want to stay away from your pain threshold or “uncle point” – the point at which you lose all faith in your plan. If your plan delivers too much volatility (especially on the downside) then you risk losing your discipline.
ADVANTAGES OF RISK AWARENESS:
- Lower stress
- Lower risk of aborting your plan
- More capable of setting and managing performance expectations
6. NOT DIVERSIFYING:
What’s the point of diversification? To reduce your portfolio’s maximum loss below that of each individual investment’s. People prefer picking winners and betting it all. The possibility of making a lot of money in a short amount of time attracts many people to this strategy. Think: the lottery. In most years, a diversified portfolio rarely beats the absolute performance of the best performing market(s) or stock(s). Consistent underperformance in the short-term can be too much to bare for some investors. So, rather than striving for steadier long-term results by building a portfolio of dierent markets and strategies, they choose to move all of their money from one market to the next attempting to catch a big winner. This strategy inherently places more emphasis on Market-timing instead of diversification.
BENEFITS OF DIVERSIFICATION:
- Rather than trade one market and experience all of the swings in that instrument, diversifying helps create a smoother ride.
- By having a large number of markets in the portfolio, you can ride the ones on the move and avoid the choppy ones
- Risking a small amount on each position, you do not have to win on every trade. You can still win even with 30-40% winners.
7. FOCUSING TOO MUCH ON WINNING PERCENTAGE:
Winning percentage matters, but so does the size of your winners. The combination of your winning percentage and average winner size tells you if you have a good strategy. No one can accurately pick winners above a 70-80% rate for an entire career. Not happening. Has never happened. Will never happen. But it doesn’t need to happen. The best traders can produce win rates of only 30-40% and still produce huge profits. How? They make up for their low winning percentage by letting their winners run. They do not cap their profit potential. If they did, then they’d have to be much more accurate in order to maintain their large profits
8. PAYING TOO MUCH ATTENTION TO NEWS AND “EXPERTS”:
Convincing media outlets can force you to jump o-your plan, often at the wrong times. TV and online personalities pitch their ideas every single day. Their job is to get you to tune in. Their strategy is selling certainty – making you believe they know what’s coming next. Investors without a plan of their own become susceptible to falling hard for convincing stock picks-jumping from one idea to the next. Media only focuses on 1) what markets to trade and 2) when to enter. They never talk about position sizing or exit methodology to protect your capital if/when the market goes against you. Investors must not concerned with pie in the sky ideas. They first must have a plan of their own and then be able to tune out other people’s opinions. When you have a plan, you already have all you need to be successful.
Also Read | Best 5 Sites for Indian Stock Market Analysis
