Three classic mistakes young traders make
Saturday, July 18, 2015
Tweet
The question I am often asked is, "How do know if someone has what it takes to be a great trader?' There is no checklist. Being a good trader is part science, part art.
However, one trait that is universal among all good traders is eliminating mistakes. One mistake can ruin a lot of good work. Here are the top six mistakes that young (and old) traders make:
1. Cutting winners too soon
This is a very classic mistake. Young traders are too quick to take a small profit when a position starts to go their way and miss the really big move. Be patient with winning trades.
Apple is a great example. If you had made a $10,000 investment in Apple in July 2002, nine months after the release of the first iPod, you would be a millionaire today.
However, how many people do you know who became millionaires trading Apple? Apple is an example of a company that everyone knows about; its explosion was in front of everyone's eyes; but it remained under owned by the public.
You may have heard ridiculous phrases like, "It's had such a big move, it can't go up anymore." In fact, when the stock was trading around $700 (before splitting 10 for 1), I heard more Apple bears than bulls.
Perhaps, it's human nature to take small gains. However, to really make a lot of money trading, you should try to be very profitable on a few trades, as opposed to trying to be slightly profitable on every call. After all, at the end of the day, there is only one way to keep score.
2. Letting losers run
This is the second classic mistake. Young traders fall in love with losers and never get out. Be impatient with losing trades! The key on losing trades is to set hard stop losses and move on.
Novice traders look for excuses on why the market is wrong and hold onto these fleabags. Remember the market is always right! You will hear excuses like "The stock is down so much, it can't go lower." Well it can go lower! Look at classic examples like Blockbuster, Polaroid or Donald Trump's popularity among Mexican-Americans.
Perhaps, inexperienced traders hesitation to cut losers stems from the fact that it is admitting defeat. Get over it! Sometimes the best trade is to get out early to only lose 5 percent, when holding too long costs you 50 percent.
3. Not focusing on your strengths
A common mistake most inexperience traders make is trading outside their comfort zone. I often see young traders have a little success trading U.S. stocks, then decide they can also trade brent crude futures.
Stick to what works. Work really hard at what you are good at. That's how you become great at something. You would never see a great stock investor like Peter Lynch stop mid-career to go trade short- term Greek debt. Just like you wouldn't see Michael Jordan quit basketball mid-career to go play baseball. (OOPS!!)
The point is, when you get good at a particular style of trading, get great at it! You can't be great until you are good. That's how you build a long-term career at this. Focus on your strengths.
The question I am often asked is, "How do know if someone has what it takes to be a great trader?' There is no checklist. Being a good trader is part science, part art.
However, one trait that is universal among all good traders is eliminating mistakes. One mistake can ruin a lot of good work. Here are the top six mistakes that young (and old) traders make:
1. Cutting winners too soon
This is a very classic mistake. Young traders are too quick to take a small profit when a position starts to go their way and miss the really big move. Be patient with winning trades.
Apple is a great example. If you had made a $10,000 investment in Apple in July 2002, nine months after the release of the first iPod, you would be a millionaire today.
However, how many people do you know who became millionaires trading Apple? Apple is an example of a company that everyone knows about; its explosion was in front of everyone's eyes; but it remained under owned by the public.
You may have heard ridiculous phrases like, "It's had such a big move, it can't go up anymore." In fact, when the stock was trading around $700 (before splitting 10 for 1), I heard more Apple bears than bulls.
Perhaps, it's human nature to take small gains. However, to really make a lot of money trading, you should try to be very profitable on a few trades, as opposed to trying to be slightly profitable on every call. After all, at the end of the day, there is only one way to keep score.
2. Letting losers run
This is the second classic mistake. Young traders fall in love with losers and never get out. Be impatient with losing trades! The key on losing trades is to set hard stop losses and move on.
Novice traders look for excuses on why the market is wrong and hold onto these fleabags. Remember the market is always right! You will hear excuses like "The stock is down so much, it can't go lower." Well it can go lower! Look at classic examples like Blockbuster, Polaroid or Donald Trump's popularity among Mexican-Americans.
Perhaps, inexperienced traders hesitation to cut losers stems from the fact that it is admitting defeat. Get over it! Sometimes the best trade is to get out early to only lose 5 percent, when holding too long costs you 50 percent.
3. Not focusing on your strengths
A common mistake most inexperience traders make is trading outside their comfort zone. I often see young traders have a little success trading U.S. stocks, then decide they can also trade brent crude futures.
Stick to what works. Work really hard at what you are good at. That's how you become great at something. You would never see a great stock investor like Peter Lynch stop mid-career to go trade short- term Greek debt. Just like you wouldn't see Michael Jordan quit basketball mid-career to go play baseball. (OOPS!!)
The point is, when you get good at a particular style of trading, get great at it! You can't be great until you are good. That's how you build a long-term career at this. Focus on your strengths.
Labels:
Daily Market Recaps Articles
