If trading were easy, everyone would be doing it.
We’ve all taken big losers. We’ve all left wins on the table. But losses aren’t such a bad thing. And while it’s never fun to lose money, failure can teach us how to become a better traders. Unless of course, you continue to make the same mistakes ad nauseam.
Smart investors accept failure as an inevitability – a temporary setback and as a teachable moment on what to do, and what not to do going forward.
Top Mistake No. 1 – Riding your Losses
Some of us never want to give up on a trade that we truly believe in. However, it’s never a good idea to let your losers ride. Admit you were wrong on a trade, and jump out. Now, that doesn’t mean you can’t buy it again. But for the time being, let it go.
Top Mistake No. 2 – You Don’t Use Stop Losses
This is one of the worst things any trader can do. One of the biggest issues facing all walks of traders is a severe lack of discipline and structure in stock buying habits. Many fail to use stop losses, or even protect gains with a simple trailing stop loss strategy. Others risk far too much.
A friend of mine once made 325% in a week’s time on a trade.
Then he risked it all on the very next trade that cost him 90% of that 325% winning.
That’s a recipe for disaster. A trader with no plan for action has already lost.
Top Mistake No. 3 – You’re Betting too Much
When it comes to investing, many of us get over-excited. We believe we found the “must own” stock of the year that could run 1,000% or more. We wind up risking far too much of our portfolio. Remember, there’s no such thing as 100% certainty with stocks, though. Risk perhaps 1% to 5% of your portfolio on a trade. And work up from there if you find great success.
Top Mistake No. 4 – You Trade Illiquid Stocks
Only consider trading small cap stocks that have volume of at least 100,000 shares a day. If you trade low volume, illiquid stocks, you may have a tough time getting out of the position, too. If your stock only trades 2,000 shares a day, what happens when you need to sell 1,000 shares that you own? You’re stuck.
Top Mistake No. 5 – Have a Trading Plan
Do you know when to exit on an up or down move? What stop losses or trailing stop losses do you have in place? Know these things, and set a plan so you won’t run into “crash and burn” scenarios as often as those with no plan.
Pros know when to just walk away from a trade. Remember, stocks don’t just move up. They also come down.
Lower expectations. Inexperienced traders expect to quit their day job and make a fast-paced, hot lifestyle out of trading. That’s not going to happen. No one ever became a brain surgeon or rocket scientist first year in. The same applies to trading. If you make a mistake, learn from it.
Remove all emotion from your trading. That doesn’t mean you have to have ice flowing through your veins. It simply means you need to re-think your strategy. No matter what your emotion says, never allow emotion to dictate your trading action.
Never wait to take profits… If you have good profits in hand, take them. Exit half of the position and let the other half run. But don’t leave profits on the table for too long.