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Learn from your Mistakes

Neophytes think their trading flaws will vanish after they get a few years of experience under their belts. But nothing could be further from the truth. In reality, even market professionals make costly mistakes that could have been avoided.

On Wednesday I made 17 trades and cashed in a series of big winners. It was a good day, but it would have been better if I didn’t throw money away with stupid trading mistakes. But I rarely lose sleep about these errors, because it’s hard to play the game with perfect discipline, day after day.

The market forgives traders’ mistakes in easy times, letting us profit despite bad judgment and poor timing. But it’s a different story when no clear trend guides the price action. In choppy and confused markets, a big loss can follow every small error.

It’s natural to make a few mistakes each day, because trading requires a thousand real-time decisions. Often the best we can do is to limit damage and understand the types of brain cramps that rob our pocketbooks.

These popular errors run the gamut from mental blunders to misguided opinions. Not surprisingly, the most common ones also cause the most damage. For example, consider how much money your blind love of tech stocks has cost you in the last six years.

We can’t eliminate trading mistakes, but we can limit their destructive power. Start by listening to the little voice in your head, and let it question every trading decision you make. In no time, you’ll find a dozen ways you’re losing money for no reason.

Let’s start with the trader who should have just taken the day off. There’s nothing worse than trading trends in a choppy market, or choppy conditions in a trending market. So make sure you know the type of environment you’re trading in before you hit the enter button.

Most traders feel compelled to be in the market each day, even when we have absolutely no edge to play. This common impulse is also a major trading mistake, because it forces us into bad positions just for the thrill of being in the action.

The solution: Learn to sit on your hands when the trading gods have nothing to offer.

Traders hate to lose money and don’t want to admit it when they’re wrong. So they press on with bad positions rather than cut their losses, trying to turn lemons into lemonade. Invariably this triggers a bigger loss than they would have incurred if they had just admitted the mistake right away.”

by Alan Farley

 

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