Wednesday, April 2, 2008

Lessons from Unsuccessful Stock Traders

Many stock traders operate with a negative expectancy, and learning not to repeat their most notable mistakes could help new traders get a head-start in the game. Any one of the mentioned slip-ups would interfere with potential successful.

Insufficient Prerequisite Education

Developing successful strategies for trading (or investing, which is simply trading in longer time frames) absolutely requires at the minimum a profound understanding of general statistics and probability theory. It only takes one semester of college, or a small number of books via self-learning. The added knowledge alone could transpire fulfillment and associated happiness.

Lack of General Planning

No planning, no profitable trading. It is that simple. The act of putting in orders seems so effortless, that many fall into the illusion of getting rich quickly staring at the charts dumbfounded. It does not work that way.

Like any business start up, only a properly designed business plan could contribute to a potentially profitable venture, especially in the highly competitive world of finance. Only realistic estimates of revenue (trading profits), expenses (transaction fees, bank wire costs, utilities, living expenses and etc.), and effective risk management could make the business model practical.

Crowd Mentality

As the majority does not perform well in this industry, following popular trends logically destines less-than-optimal outcomes. The major financial websites, TV news releases function to sway the general public toward certain sentiments. Allowing these external influences direct one’s own strategic convictions then naturally leads to losing trades, like most of the crowd.

Lack of Discipline

Once a plan has formed, only flawless execution could get this kind of business up and running. A lack of emotional intelligence hurts performance.

Getting in front of the monitor on time, staying alert, avoiding fat-finger mistakes (e.g. keying in a wrong ticker symbol), holding onto positions while waiting for exit strategy to unfold are some of the crucial parts of a profitable trading system. Most fail to control urges such as sleep, boredom, anxiety, fear, etc. and end up losing money.

Gaining Experience and Winning

A successful businessman had once quoted “I’m successful because I learned from experience.” When asked how he gained experience, “by making mistakes.” Learning off mistakes from others is truly a privilege, and only after adequate education could one begin to formulate a practical plan for success. While difficult and tedious, it is not impossible.

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