Five Rookie Trader Mistakes to Avoid
10/06/2010 12:01 am EST
In trading, as in life, lessons can be learned out of inspiration or desperation. It’s hard to say which is better, but I know that regret is quite a teacher.
For example, I’m in the process of buying a house right now, which will be the second for my wife and me. Eight years ago, I made several mistakes as a first-time buyer, some of which I’ve wished I could go back and change. Experience educates each of us, fortunately, and needless to say, this time around (I think) I’m doing it right.
A lack of experience is responsible for many mistakes newer traders make as well. Those errors not only prove costly the first time around, but they can also ingrain some bad habits if not corrected quickly.
Over the years, I’ve been fortunate to work with hundreds of traders around the globe, of all trading styles and time frames. And yet as diverse as these traders seem to be, a handful of common issues continue to surface. Coincidence? No; just human nature, which the market preys upon.
So, to help you stay on the right path with your trading, let’s take a look at five common mistakes that rookie (or struggling) traders make, and how to avoid them.
1. Adding to Losing Positions
This is a biggie, and it addresses perhaps the most common lapses in judgment among traders of all experience levels. Dennis Gartman says to “Do more of what is working and less of what isn’t working.” By definition, a losing position is not working. And unless you originally planned to scale into the trade, adding to a loss is a big no-no. Take note of your profit and loss (P&L), and if you’re wrong, avoid throwing good money after bad.
2. Forcing Trades out of Boredom
Boredom is one of the biggest enemies of today’s trader because it leads to so many bad decisions (like overtrading). Transaction costs are so low and it’s so easy to place trades that one can easily forget just how costly boredom trades can become. So if you’ve done your homework and come up with very little, place no pressure on yourself to be active. There are times where sitting tight is exactly what you should be doing, so have the courage and discipline to do nothing when that’s the case.
3. Switching Strategies by the Day
I’m all for trading with multiple strategies, and as your experience increases, your trading toolbelt will begin to fill. However, each of us during times of struggle has encountered the losing streak. That’s perhaps the biggest cause for traders to throw the proverbial spaghetti at a wall to see what sticks. While experimenting can yield some clarity, doing it in either the wrong fashion or too frequently can prove counterproductive. Get some trader training, put some strategies to work across multiple time frames, and give them enough time to prove their effectiveness. Trying something for a day, losing money with it, and shifting quickly to something else isn’t responsible, so avoid that limited mindset.
4. Putting Everything on the Line for one “Idea” Trade
I was once warned by a more experienced trader, “Don’t get any ideas!“ He was right. A longer-term thesis takes time to play out, so leave that to the fundamentalists who don’t mind tying up their capital for months on end—for better or for worse. Stick with what the price action is telling you and determine the best opportunities to get on board for the next move. Ideas are only useful when they relate to technical discoveries, so don’t bank on guessing right for one big recovery play—it may instead prove to be the final nail in the coffin.
5. Hoping a Stock Will Recover
Each of us has been trapped by a bad trade, and we’ve wondered if sitting motionless and simply hoping to be let out of the trap is the best solution. Marty Schwartz, of Pit Bull fame, mentioned how as a soldier, he was trained to do something when under attack, either fight back or retreat, but don’t just sit there. Hope truly is a four-letter word in the trading realm, and relying solely on hope will provide plenty of damage to your trading account. Stops are available for good reason. Game plans offer if/then scenarios to follow under the gun so that big decisions need not be made in times of stress or volatility.
Avoid making these mistakes and your money will be much harder for the pros to take!By Jeff White, trader and founder of The Stock Bandit University