You started trading when you thought to make some extra money. However what I have observed is that hardly anyone has made money till now, in fact trading became an easy way of losing money.
Today I would like to highlight few undisciplined trading style. These are the reasons which I observed as a trader, and also as a Financial Coach now because I keep talking to many retail traders every day. If you want to safeguard your hard earned money please read ahead. These are the main mistakes which you make in the market and suffer huge losses:
- Blindly follow Analyst/advisor – Will you carry a business that you don’t know anything about? Obviously you will not. Then why are you trading when you don’t know anything about the market? Will you invest money in the business on someone (Who is not actually performing the business) else’s call? Then why are you trading at analyst’s call? Analyst is not a trader. An analyst cannot understand the problems, feelings, emotions and greed of the trader. Ultimately their tip can lead you to the devastating loss.
- Eagerness in profit booking – Most traders tend to book profits too early just to enjoy the winning feelings, thereby letting go substantial gain even when they made a very good entry into the market.Remember, most money is made not by brilliant entries but by sitting on profitable positions for long enough. The maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.
- Over Trading – This style of trading wipes out the portfolio of a trader who is having very less fund available with them to trade and wants to make huge profit. Due to small investment fund, the profit generated seems small so trader starts using leverage given by his broker on his account. The broker motivates him to go for bigger shots gauging his greed rightly and the trader starts taking blind risk. Always take a calculated risk.
- Loss Averaging – Trading should consist of small profits, small losses and big profits. Big losses must be avoided. Loss averaging mostly leads to big losses. Why we go for big losses because we do not book our loss at early stage. We never accept losses as the part of our trading life. We only think about profits in spite of knowing the fact that losses are the biggest truth of the stock market. We fear taking risk by booking losses and that becomes the main source of devastation of our trading life.
- Trading for emotional highs – Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.
- Failing to treat every trade as just another trade – Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy draw-down as such situations often do not work out. Every trade is just another trade and only normal profits should be expected every time. Super-normal profits are a bonus when they– rarely! — occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.
- Free Trial – Free trial is the new way of trap used by advisors and analyst in the Finance market. These guys completely understand the mindset of middle class where one feels good to know that he is getting for free so no risk is involved. Everyone knows this truth that “There is no free lunch in the world”, still they want everything for free though they can’t offer anything of their own for free to others. You have to understand that if today you are getting anything for free, later you make yourself liable to pay huge in lieu of free thing.
Trading is a loner’s job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market.
If a trader has to ask someone else about his trade then he should only go with a real and successful trader. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management & risk management skills. Successful traders recognize that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.
To conclude, human psychology and trading behavior is something you need to work upon. It plays 70-75% role in shaping your trading career. If you observe all the 7 points mentioned above are totally related to your psychology. Hence improving your psychology and behavior will change your trading life in a big way.
To improve the trading behavior, I will recommend you to please read this book – The Reminiscences of Stock Operator by Edwin Lefevre. Reading this book twice or thrice till the time you feel that you have learnt to control your emotions. This book has changed me as a trader and will certainly do the same for you.
Author: Abishek Raaman