We looked at five losing trader mistakes in my last article and this week we’ll cover five more.
Being aware of mistakes can help you recognise the problems in your own trading.
Once you’ve identified these you can then take steps to fix them.
Let’s move on to number 6.
6. Getting emotional
Emotions wreak havoc in financial markets.
This is because we’ve been tuned to do the exact opposite of what success in financial markets looks like.
And when we’re trading emotionally, we’re no longer thinking rationally.
This is what is known in poker as ‘tilt’. Professional poker players know the odds and what they’re supposed to do. But they can be thrown off their game and talked into doing things that they shouldn’t do out of emotion.
It’s not uncommon for players to try and psyche each other out and goad players into making mistakes.
If you haven’t read Maria Konnikova’s book The Biggest Bluff – it’s worth a read as much of what she writes about translates into dealing in the stock market. This is coming with someone who has absolutely zero interest in poker.
The best way to deal with your emotions is to create a plan before you enter a trade and then follow the plan. If you have a big win or a big loss then take some time out before you come back to the market.
7. Falling in love with a stock
This is a common one with many private investors. I’ve seen several private investors talking about the same stocks for over five years and in that period the company has struggled to achieve anything of note, followed by share placing after placing and a falling share price.
Yet no matter what news the company puts out – guess what? It’s always good news!
This is the issue of allowing yourself to fall in love with a stock.
Not only that, but the person then identifies with the stock and will double down because they don’t want to be wrong.
It’s hard to admit after five years of being a cheerleader for a stock that you were wrong. Rather, these people would rather double down and refuse to accept information that conflicts with their beliefs.
Often, these people are only put out of their misery when the stock goes bust.
8. Not doing the work
This is an obvious one. Dealing in the financial markets is neither easy nor a walk in the park. On any given day, you’re only ever one stock away from losing all of your money.
Whenever people ask me about stock tips, I tell them I don’t do tips but I can offer them books and resources on how to do it themselves.
More often than not, their eyes glaze over and I can see that they regret asking.
Unfortunately, many such types will come to the stock market expecting riches to be put in their pocket without the equivalent effort usually required to attain such riches.
These are the people who provide liquidity for those that know what they’re doing and stick to knowing what they know works.
That leads us onto number nine!
9. Lacking discipline
I genuinely believe that you could give a trader a step-by-step formula of exactly what to do in the stock market and most people still wouldn’t make any money.
This is because people have a tendency to focus only on the latest results of their strategy.
Four losing trades in a row? The strategy doesn’t work!
People making gains in a hot sector? Better sell my stocks and chase the rainbow!
Don’t fall into the trap of jumping strategies because you had a few bad results.
Look at the data in your journal and also your backtested data.
Four trades are random. 400 trades are data.
You can also check to see if you got slipped on any of the trades, if you executed your plan, if your stop placement was optimal.
Whilst you shouldn’t automatically assume the strategy is wrong, it’s always worth checking your trades to make sure you are executing well.
10. The breakeven trade
The final losing trader mistake we’ll cover in this article is the breakeven trade.
It’s the trade that continuously gets people because they don’t want their ego to take a hit and crystallise a loss.
If you’re down on a stock that you haven’t sold, then you’ve already lost money. Just because you haven’t sold doesn’t mean you haven’t lost.
The idea that “if you don’t sell you can’t lose” is dangerous.
I know one gentleman who bought a stock that has since changed its name at least twice that I know of. He’s been diluted into oblivion and is 99.9% down.
If the stock doubles, he has now been diluted so much that I believe he’d still be 99.9% down because of rounding.
He hasn’t sold. But he’s sure lost money. What was once real, is now no longer so.
This mindset and wanting to avoid loss is why the breakeven trade is a classic mistake.
If a stock is just a few points away from breakeven, rather than take the loss the trader will want to wait until it gets back to breakeven then sell it.
If you’re no longer a bull, yet you’re still owning the stock, this is ridiculous!
Next time you’re in the position of holding and waiting for breakeven, remember this article and close your position.
Often, you end up wishing you’d sold because the price goes down further.
And if the stock does get back to breakeven and you breathe a sigh of relief and sell, this is only reinforcing bad habits.
Michael Taylor
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Twitter: @shiftingshares
