People lose money at the stock market for very simple reasons:
1. They don't have a method at all. They rely on other people opinions.
2. People don't have a winning method. The method they are trading has a negative expectancy. Being disciplined about stop losses and position sizing won't help, if you are trading a losing method. Expectancy changes with volatility. When your method stops providing satisfying results, you either find another that is working in the current market conditions or stay on the side until things change.
3. Those who have a winning strategy often don't use it. They get emotional and forget about their strategy.
“Good trading is 10% technology and 90% psychology. People defeat themselves. It doesn’t matter how often you repeat basic trading principles when almost no one will practice them” (Maoxian)
Everybody knows the four cardinal rules of trading, but so few people follow them — 1) Trade with the trend. 2) Cut losses short. 3) Let profits run. 4) Manage risk.
There is a big difference between knowing something and applying it. Most people don't use what they know.
8 Comments:
I have this plaque that hangs right in front of me with a list of 50 rules. Always helps to have something physically in front of you.
I use the same approach. I have 7 lists on the wall behind my desk. 2 lists are about risk management. 1 list is about methods I use to generate trading ideas. 2 lists are about short trading insights. 2 lists are about thoughts that I live by - my living philosophy. I look at them every day. It really helps to stay focused, to be more profitable and be a better human being.
I love this one from John Junor: "An ounce of emotion is equal to a ton of facts".
She looks like a winner!
I just keep this small quote on my computer screen.
"Bulls make money, Bears make money, and Pigs get slaughtered."
50 rules seems like the Simon song "50 ways to lose your lover."
Daniel
Most often, traders have four fears. There’s the fear of being wrong, the fear of losing money, the fear of missing out and the fear of leaving money on the table. I found that basically, those four fears accounted for probably 90% to 95% of the trading errors that we make. Let’s put it this way: If you can recognize opportunity, what’s going to prevent you from executing your trades properly? Your fear. Your fears immobilize you. Your fears distort your perception of market information in ways that don’t allow you to utilize what you know. - MARK DOUGLAS
It's easy to tap into fear when everyone around you is afraid.
Ivanhoff,
I have found your thoughts quiet helpful on a number of occasions. Thank you.
In the last two months i have been making some great dollars with positions in DXD, SDK and SSG. As you know, these are all ultrashorts. How would you protect or insure these positions against adverse moves?
The puts on DXD appear very high.
Thank you for any advise offered.
Black Flag Trader
Andrew, thank you for mentioning Mark Douglas - a favorite author of mine.
We should not fear of being wrong. We should accept that we could be wrong more often than we will be right. What is important is not how often you are right or wrong, but how much you lose when you are right and how much you make when you are right.
We should not be afraid of losing money, because if you don't bet, you can't win; but if you lose all your chips, you can't bet.So be careful.
We should not fear of missing out a profitable trade. There will be thousands other trades. Losing on one or missing on one, even if it turns out to be the biggest winner, should not have big impact on your return in longerterm prospect.
We should not fear of leaving money on the table. In fact the only way to maximize out profits is to be willing to give some of them back (by trailing your profit protection stop order)
Anon,
double inverse ETFs are really hard to manage due to their tremendous volatility. Even if you put a profit protection stop, there are no guarantees that the ETF won't gap down below your order the very next day. I have no idea at what point you have entered the mentioned ETFs, but I assume that you have achieved nice profits. I would sell half of my position to lock in some profit and then trail with a $5-10 stop order for the rest of the positions. For the remaining half of your positions you could sell some slightly Out of the money calls with November expiration, which means in two days. In the case with DXD, you might sell NOV $95 calls for above $2. If DXD closes above 95 by Friday afternoon, you will get exersized and will sell your stocks at $95 a piece and you will keep your premium. The downfall of selling a call is that you might miss on much higher move by DXD. If DXD reverses back, you will keep your premium and you will sell your stocks if they break below your profit protection stop. (for DXD $80 looks reasonable stop).
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