You Better Believe it Buster!

These three habits will destroy you as a trader:

There comes a time in our trading careers were we hit a streak, and we might even feel like we are on top of the world. However, no matter where you are, here are some simple things you should make sure you do not fall into:

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1. Always remain vigilant of your surroundings: This means not surrendering to distractions. Have the urge to check your phone every few minutes? Fiddle with multiple electronics? Switch from task to task with no purpose? I’m afraid this is not a habit shared by successful traders. You must be totally focused on the task at hand, never surrendering your energy until the current session is complete.

2. Honor your plan: This means having to make tough decisions ahead of time about the amount of risk your portfolio can tolerate. Under no circumstances should you deviate from your plan unless the circumstances change. Here’s a good example: let’s say you’re a value trader, for instance, and you prefer to accumulate heavily in only a select few positions. You prefer to hold for awhile, perhaps selling after a year or more. New data is released about a stock the night before that will have it open down over 50%. Perhaps your risk tolerance for this position was 25%.

However, this came out of nowhere. There was literally nothing you could have done except planned in advance by limiting portfolio size. What do you do? At this point, you’ll need to decide if your original thesis still holds true and whether you plan to stick it out with this company. Either way, it makes little sense to stop out on the worst day of this stock’s history. If the stock has a mean reverting tendency, you’re better off waiting a few days and trimming it near the highs, if you no longer believe in the company.

3. Follow truth: There’s a tendency among traders to set extraordinarily high expectations regarding percentage gains, and even when they are reached, want more and more. While there is certainly nothing wrong about making a great trade, eventually the tide may turn against us. We must be able to take action immediately as to not be at the mercy of others. This applies to life too. To further expand on this topic, this even applies to traders setting perfectly reasonable targets of 20, 30, or 40% on tech companies they diligently researched.

I’ve seen it again and again: the results can be disastrous. Their hearts become filled with greed, and at that moment, they lose everything. So, what do we learn from this? No matter the situation, we must try to act with perfect morality. If we are a new trader starting out, this means thoroughly researching our trades ahead of time, keeping solid records, and most importantly, keeping our position size reasonable; we have to remind ourselves that at some point there will be opportunities, which is why preservation of our capital and emotional health should be of utmost (and equal) importance.

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