Many
people think trading is the simplest way of making money in the stock market.
Far from it; I believe it is the easiest way of losing money. I discuss below
eight ways of undisciplined trading which lead to losses. Guard against them,
or the market will wipe you out.
1.
Trading during the first half-hour of the session
The first
half-hour of the trading day is driven by emotion, affected by overnight
movements in the global markets, and hangover of the previous day's trading.
Also, this is the period used by the market to entice novice traders into
taking a position which might be contrary to the real trend which emerges only
later in the day. Most experienced traders simply watch the markets for the
first half of the day for intraday patterns and any subsequent trading
breakouts.
2.
Failing to hear the market's message
Personally,
I try to hear the message of the markets and then try to confirm it with the
charts. During the trading day, I like to watch if the market is able to hold
certain levels or not. I like to go long around the end of the day if supported
by patterns, and if the prices are consistently holding on to higher levels. I
like to go short if the market is giving up higher levels, unable to sustain
them and the patterns support a down move of the market. This technique is
called tape watching and all full-time traders practice it in some shape or
form. If the markets are choppy and oscillate within a small range, then the
market's message is to keep out.If the charts say
that the market is acting in a certain way, go ahead and accept it. The market
is right all the time. This is probably even truer than the more common wisdom
about the customer being the king. If you can accept the market as king, you
will end up as a very rich trader, indeed. Herein lies one reason why people
who think they are very educated and smart often get trashed by the market
because this market doesn't care who you are and it's certainly not there to
help you. So expect no mercy from it; in fact, think of it as something that is
there to take away your money, unless you take steps to protect yourself.
3.
Ignoring which phase the market is in
It is
important to know what phase the market is in whether it's in a trending or
a trading phase. In a trending phase, you go and buy/sell breakouts, but in a
trading phase you buy weakness and sell strength. Traders who do not understand
the mood of the market often end up using the wrong indicators in the wrong
market conditions. This is an area where humility comes in. Trading in the
market is like blind man walking with the help of a stick. You need to be
extremely flexible in changing positions and in trying to develop a feel for
the market. This feel is then backed by the various technical indicators in
confirming the phase of the market.
4.
Failing to reduce position size when warranted
Traders
should be flexible in reducing their position size whenever the market is not
giving clear signals. For example, if you take an average position of 3,000
shares in Nifty futures, you should be ready to reduce it to 1,000 shares. This
can happen either when trading counter trend or when the market is not
displaying a strong trend. Your exposure to the market should depend on the
market's mood at any given point in the market. You should book partial profits
as soon as the trade starts earning two to three times the average risk taken.
5.
Failing to treat every trade as just another trade
Undisciplined
traders often think that a particular situation is sure to give profits and
sometimes take risk several times their normal level. This can lead to a heavy
drawdown as such situations often do not work out. Every trade is just another
trade and only normal profits should be expected every time. Supernormal
profits are a bonus when they -- rarely! -- occur but should not be expected.
The risk should not be increased unless your account equity grows enough to
service that risk.
6.
Over-eagerness in booking profits
Profits
in any trading account are often skewed to only a few trades. Traders should
not be over-eager to book profits so long the market is acting right. Most
traders tend to book profits too early in order to enjoy the winning feeling,
thereby letting go substantial trends even when they have got a good entry into
the market. If at all, profit booking should be done in stages, always keeping
some position open to take advantage of the rest of the move. Remember trading
should consist of small profits, small losses, and big profits. Big losses are
what must be avoided. The purpose of trading should be to get a position
substantially into money, and then maintain trailing stop losses to protect
profits. Most trading is breakeven trading. Accounts sizes and income from
trading are enhanced only when you make eight to ten times your risk. If you
can make this happens once a month or even once in two months, you would be
fine. The important point here is to not get shaken by the daily noise of the
market and to see the market through to its logical target. Remember, most
money is made not by brilliant entries but by sitting on profitable positions
long enough. It's boring to do nothing once a position is taken but the
maturity of a trader is known not by the number of trades he makes but the
amount of time he sits on profitable trades and hence the quantum of profits that
he generates.
7.
Trading for emotional highs
Trading
is an expensive place to get emotional excitement or to be treated as an
adventure sport. Traders need to keep a high degree of emotional balance to
trade successfully. If you are stressed because of some unrelated events, there
is no need to add trading stress to it. Trading should be avoided in periods of
high emotional stress.
8.
Failing to realize that trading decisions are not about consensus building
Our
training since childhood often hampers the behaviour necessary for successful
trading. We are always taught that whenever we take a decision, we should
consult a number of people, and then do what the majority thinks is right. The
truth of this market is that it never does what the majority thinks it will do.
Trading is a loner's job. Traders should not talk to a lot of people during
trading hours. They can talk to experienced traders after market hours but more
on methodology than on what the other trader thinks about the market. If a
trader has to ask someone else about his trade then he should not be in it.
Traders should constantly try to improve their trading skills and by trading
skills I mean not only charting skills but also position sizing and money
management skills. Successful traders recognize that money cannot be made
equally easily all the time in the market. They back off for a while if the
market is too volatile or choppy.