Thursday, 21 February 2008

Behaviors that will Guarantee Losses in the Markets

  • Lack of discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others than take the time to learn for themselves. People are lazy when it comes to the education needed for trading.
  • Impatience: People have an insatiable need for action. It may be the adrenaline rush they’re after, their “gambler’s high”. Trading is about patience and objective decision-making, not action addiction.
  • No objectivity: We tend not to cut losses fast enough. It goes “against the grain” to sell. At the same time, we often get out of winners too soon. In both cases, we are unable to disengage emotionally from the market. We marry our positions.
  • Greed: Traders try to pick tops or bottoms in hopes they’ll be able to “time” their trades to maximize their profits. A desire for quick profits can blind traders to the real hard work needed to win.
  • Refusal to accept truth: Traders do not want to believe the only truth is price action. As a result, they act contrary to the trend, and set the stage for the losses that almost always arrive.
  • Impulsive behavior: Traders often jump into a market based on a story in the morning paper. Markets discount news by the time it is published. Thinking that if you act quickly, somehow you will beat everybody else in the great day-trading race is a grand recipe for failure.
  • Inability to stay in the present: To be a successful trader, you can’t spend you time thinking about how you’re going to spend your profits. Trading because you have to have money is not a wise state of mind in which to make decisions.
  • Avoid false parallels: Just because the market behaved one way in 1930, does not mean a similar pattern today will give the same result.
Source: Michael W. Covel: Trend Following

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