If you know the pitfalls of trad¬ing, you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly” mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.
Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.
Overtrading is a problem for many traders, especially inexperienced ones. Many traders think that “quantity” is better than “quality,” and they assume that if you just throw enough punches, one will eventually hit. The truth is that the only person who gets rich from this strategy is your broker, not you.
Traders overtrade for three reasons, and none of them are good:
The first is greed. Imagine that you just closed a winning trade. You followed your plan and made the profits that you were looking for. But the market keeps going up. You think, “I should have stayed in this trade,” so you jump right back in. And then you realize that YOU were the one who just bought the high of the day. Greed can cause you to overlook details like this because it makes you act without thinking. Remember that every trade you make should be based on your overall strategy, never based on a spur-of-the-moment decision.
The second reason for overtrading is revenge. Imagine that you just lost money on a trade. The market has been mean to you for several days or even weeks. “They” just took out your stop and now the market keeps moving in your direction. So you want to get back at them. You keep trading, thinking, “The next trade will make back all the money I lost so far, and that will hurt them.” Believe me: the market is ALWAYS stronger, and it will be YOU who gets the bloody nose. The desire for revenge can make you forget that the market doesn’t care about you and doesn’t even recognize you. It’s a system of anonymous forces, and there is no “they.” Don’t imagine that you’re in competition with anyone but yourself and your own self-control.
The final reason for overtrading is boredom. There are some days when the ducks simply don’t line up. You’re watching the markets and it’s like watching paint dry: nothing moves. You wait. And wait. And wait. And suddenly you just get that “itch” to trade. You think, “If I don’t trade, I won’t make any money!” and you jump into a trade immediately. Of course, the trade isn’t according to your plan, and you end up with a loss. Boredom can lead you to trade when there’s really nothing to trade. With that kind of strategy, you will lose money, guaranteed!
If you want to succeed in trading, then you must understand the concept of taking only the “high-probability trades.” Less is more. You should design a strategy that allows you to recognize when the market is in your favor and trade ONLY according to that strategy.
Follow that plan, and you will profit.
Markus Heitkoetter is the author of the internation bestseller "The Complete Guide to Daytrading" and a professional day trading coach. For more free information on day trading visit his website www.rockwelltrading.com.
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