Trading by the "gut feeling" method. About trader's mistakes
In this article we would like to address the issue of the most common mistakes of traders. At first glance, the topic is rich and inexhaustible. But, if we analyze the causes of these errors, it turns out that there are not so many catalysts for their appearance.
Let's start by checking yourself. Whatever trading mistakes and problems you decide to get rid of, look at yourself in relation to two parameters:
1- Are you trading at a loose and comfortable amount?
Can you say that the money you put into the stock market is not critical to your financial plan for the coming years?
I have repeatedly raised the topic of choosing the right amount of money for stock trading, determining the acceptable level of risk for a personal portfolio, and, consequently, the selection of instruments. I will not repeat myself and will write about a new problem related to a certain misunderstanding between novice investors and market professionals.
In the past, market gurus used to say that the money you bring to the stock exchange should be worth losing. With the development of technology, traders are informed that it is possible to safely place money that is free for only a year, or even half a year. For a strange reason, the information about the possibility of such short-term investment remains in traders' minds, but the tools recommended by experts for such purposes are forgotten. As a result, we see people who lay down risks on their portfolios not more than 20%, but at the same time actively speculate in futures and options. These instruments carry higher risk a priori, simply by definition!
Here, I think, I will encounter objections from experienced traders who will say that derivatives can be protective assets and even give guaranteed earnings. My friends, I am aware of that, but we are talking about beginners, for whom protective strategies are simply beyond their capabilities. However, this is half the problem, if a person soberly assesses the acceptable risk, he is already on the way to success.
People often bring a substantial amount of money to the market, lose some of it, get scared, and only then turn to a consultant. They find it difficult to answer the legitimate question about the risk to the portfolio. What risks? Market gurus told us only to go forward, only to win! The maximum that can be squeezed out of such traders is a definition of risk per transaction. They do not even realize that there can be a whole pool of unsuccessful trades. How come? The guru promised that tomorrow we will win back! Moreover, this guru can be a figurative, collective character, a figment of the trader's imagination and conceit.
Free and comfortable amount, understanding the risk on capital is what cures 90% trading mistakes. But the risk to capital is variable and highly dependent on personal circumstances. To see if your strategy can handle a change in your personal financial plan, you need to check something else.
2. Do you know your strategy?
If the risk is defined, the amount is selected correctly, you are still not 100% insured against stock mistakes. In particular, from stupor before new deals! This fear often arises because you do not know the future. Many times you have tried to predict it, but "failed"!
And in life, do you have the gift of fortune-telling on everyday matters? Hardly! Only past experience gives you the ability to predict events, and even then with a certain probability. You touch a fire, it hurts. Put sugar in your coffee, it's sweet. How do you know? My mom showed me, I tried it myself, I read a review on the Internet, I took a chance.
Why don't you do that in the market? Why before you press the "buy" button after the moving averages cross under the price, don't you check how often these signals appeared in the past, and how much money they brought before you decided to use this method.
The popular answer is why, because the market is different now? Then why do you take the old methods? Where is the logic? Why all this dancing with tambourines, dancing with indicators! Maybe because you are just weak to admit that your main method is the same as the old one. "foolproof" trading? Realistically, it is somehow even unseemly to tell my relatives that I took the family budget money and manage it on the stock exchange without preliminary strategy testing - as God wills.
When you use incomprehensible indicators, you can always justify in case of failure that you did everything correctly, as it should be according to the indicator, which was advised by a guru, just the market is bad now... Yes, if you sit in a kayak on the expressway, no matter how hard you paddle - you will not go far.
Test your strategies - the key to the future lies in the past!