“The single most important advice I can give anybody is: Learn from your mistakes. That is the only way to become a successful trader.”
Make it a habit to review all your trades once a month. Notice where you entered and ask yourself why did you initiated such a position. What was the underlying reason behind your move. Was it pure emotional reaction or strictly following a plan. What were your exit rules and how well did they help you to preserve capital and maximize profits. No other exersize will teach you more about your weaknesses and strengths.
I never try to buy a bottom or sell a top. Even if you manage to pick the bottom, the market can end up sitting there for years and tying up your capital. You don’t want to have a position before a move has started.”
The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.”
The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”
Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.
When I became a winner I went from ‘I figured it out, therefore it can’t be wrong’ to ‘I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.'”
Make a list of everything that can go wrong and determine how you will respond to that situation. That will be the key to your success – knowing how to respond to the unexpected.”
Ask 3 essential questions:
1. Why am I taking this particular trade? ( is it part of carefully prepared plan, or is it an emotional reaction; what is the catalyst behind the move and does it have the potential to sent the stock’s price higher; are there other better trading alternatives for my money)
2. What if a am wrong? (figure out where and when I will exit, before I initiate the trade; where is my stop loss and does it makes sense to be put there; how much am I risking? How am I going to protect my capital against “unexpected” gaps)
3. What if I am right? (how am I going to protect my profits; where I would exit and why)
Remember that good trading is all about managing risk. If you are entering a position without knowing where you are getting out when you’re wrong, then you’re sunk before you begin.
“The crowd may be stupid, but they are stronger than you. Crowds have the power to create trends. Never buck a trend. If a trend is up, you should only buy or stand aside. Never sell short because “prices are too high” — never argue with the crowd. You do not have to run with the crowd — but you should never run against it.
Dr. Alexander Elder