Successful traders are not born…they learn what strategies fit their personalities, manage risk properly and aren’t stubborn. The quicker you figure out what works and stop taking on trades that don’t work, the sooner you’ll get to become profitable. That in mind, new traders tend to have very bad habits, slowing down their progress and potentially destroying their trading accounts, forcing them out of the game too early. Let’s look these account-destroying habits and how to kick them.
Not Having the Ability to Admit You’re Wrong
If your goal is acceptance, you shouldn’t be trading at all. Trading is not about being right or wrong…it’s about making money. If you have a strategy that works 30% of the time, but is profitable, then it’s a good strategy. I know, it’s completely different from what we’re accustomed to, but in trading the highest win percentage doesn’t necessarily mean you’re the richest person in the room.
Admitting when your wrong means the willingness to get out of a position before the losses get out of hand. In his career, Jose Canseco struck out over 1,900 times but ranks in the top 40 home-run hitters
The market doesn’t lie, and it doesn’t care about your positions. This is one of the keys to trading success: If you’re wrong, cut your losses and don’t be stubborn.
How can you do a better job and get into the habit of admitting you’re wrong?
Create a plan.
For example, our community typically has a set plan and we stick to that:
This is a plan, win, lose or draw. We have a pattern that has been proven to work in the past. There are always prices at which we’d like to enter and get out: entry, target and stop. The entry is where we want to get in, whether it be long or short. The target is where we think the stock could run to, while the stop is where we would get out if the stock moves against us.
Newbie traders generally have a partial plan, usually concerning themselves with profits and miss the finer details.
When you don’t have a plan, you become vulnerable and emotions start running. If you let the trade run too far against you, you could only pray the stock reverses back in your favor. This is not how you become a successful trader. It’s much easier to admit when you’re wrong and stick to your plan.
No Self Control
Traders who have discipline are those who stay in the game for the long haul. On the other hand, newer traders tend to lack discipline and neglect their plans
Newbies will jump into trades without fully understanding what is going on in the stock. For example, they might buy a stock because it’s “down too much,” without taking the time to figure out the catalyst that sparked the selloff. The same is true if a new trader shorts a stock because it’s “up too much.”
Self-control is about sitting on your hands and waiting for the ideal setup to come your way. The reality is: You don’t have to be glued to your chair and stare at your screens all day. If you don’t see opportunities, it’s okay to walk away from the screen.
Newbie traders will force the action…because they want action. This is a terrible habit and you should avoid it at all costs. The last thing you want to do is get into a trade cause you’re bored, only for a catalyst to come out…and bam, there’s a catalyst and the stock moves against you. If the market isn’t offering you opportunities, then it’s best to wait. Being flat on the day is better than losing money. Your trading account shouldn’t be a substitute for the casino. Learn when to fold and when to press it.
How can you learn to cut your losses and press it? Journal your trades and study your winners and losers. Go through your trades and outline your mistakes. Try to figure out if your strategy doesn’t work or you let emotions run too deep. Learning from mistakes is a great way to improve. If you’re not insane then you’ll eventually stop repeating the same mistakes, but that’s only if you study and know what they are.
Not Coming into the Trading Day Prepared
Are you trading a stock that just released earnings but haven’t bothered to check out it’s filings or read the transcript on the conference call? Well, that’s an example being ill-prepared.
Are you taking a big position in energy stocks on Wednesday, without realizing that there is a potential catalyst that can have a dramatic impact on them? The EIA Petroleum Status Report is released every Wednesday at 10:30 AM ET, and if you’re not aware of this and take the wrong side, you could get hurt. That’s another example of not coming correct.
Are you coming into the morning not knowing how the futures are trading? Do you read or watch the news, see which stocks were upgraded/downgraded, study your charts and create a watchlist? If you don’t do any of this, then you are not prepared and could lose money for no reason. You need to have a plan and follow the markets if you want to be successful.
Of course, as you improve, new problems will arise. For example, maybe you know how to pick good trades but are struggling when it comes to selecting your share size. Or you pick the right trade but are scared to see it play out, so you decide to take small profits on something that would have turned out to be a big winner.
Reviewing your game plan, learning from your winners and losers can help in these areas too. If you see that a battle-tested strategy is working, then it might be easier to stick with your plan, instead of relying on memory alone.
You could beat the markets, but you need to develop the right habits to get there.
Jason Bond runs JasonBondPicks.com and is a swing trader of small-cap stocks.