Learning is a continual process, not only because knowledge is limitless, but the environment always changes. I think it is important to capture and consolidate what I have learnt as a trader. So I will be starting a series of “Lessons Learnt as a Trader (so far)” to do just that.
Focus on potential loss, not potential gain
It is easy to be influenced by greed. When we decide whether to do something, we evaluate based on the benefits we are potentially going to get. For e.g., we invest to get profits, if not why invest at all. In other words, we are motivated by benefits.
This is where the problem comes. I tend to evaluate stocks based on the potential gains and not the potential loss. At times, I overexposed my capital or risking more than what I should be doing by adding too many positions. All because I felt bullish about the stocks. The key is nobody can be so sure that the stock market will go up the next few days, weeks, months or years. So the correct way is to focus on how much I can afford to lose and not be swayed by greed. As long as I sized my position properly, my trading account will not be wiped out. The priority is to focus on surviving and like what teacher says, “limit the downside and the upside will take care of itself.”
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Adopt a Zen approach to trading
Humans are emotional beings. Psychological tests have shown that humans found more pain in losses than the enjoyment in profits. A person is more affected by a $1 loss than a $1 gain. As in, the intensity of emotions is greater for the loss than the gain even though they are of the same magnitude. This means that greed drives us to trade the market, but we become worried about losses after we have the contracts. All these emotions entangled with trading decisions jeopardize trading profits.
It is very difficult not to be affected at all by profits and losses but it is necessary to control the emotions. I believe a Zen master will be able to trade well because he can detach his emotions. A loss is nothing personal and a gain is nothing to be cheerful about.
My personal experience is that the trades that I rushed in usually turned out bad. I tend to do better when I have more time to analsye in a relaxed state. I must learn to stay calm and not be anxious to make profits. Do not rush trades.
Lose the battle but win the war
There is a need to focus the analysis on individual stocks, but a trader must have a longer horizon. That is, on the overall, is he growing his capital? He can afford to have losses along the way. The losses are acceptable as long as he has sound planning beforehand and execute accordingly, but he lost because market condition changed. This is not his fault. He lost the battle, but he has not lost the war. He must continue to focus on doing his trade properly and eventaully he will big battles and eventually the war, closing the year with good profits. To string the previous 2 points togther: a trader must approach a trade with caution, measuring the loss and risk to take, and thereafter follow as planned. If the trade turned into the loss, do not be affected emotionally, give yourself a pat if you followed your plan, and learn from it if you made a mistake. But carry on trading and fight the next battle, because you know you will win the war eventually as long as each battle is handled correctly.
On the contrary, do not boast about your 1 or 2 winning trades, because if you have not being doing the right thing, the market will punish you eventually. So what if you won the few battles but lost the war.
Almost everyone trades on retracement
This point is a tactical issue. I noticed that almost every trader trades on retracement, regardless the method used. Price must pullback before the trader will enter a trade. Even for a price breakout system that I used, I would need to wait for price pullback or retracement before entering. You will see the similarity in those who use trendline bounce as well as entries upon price touching the moving average. A trader who does not enter after a retracement risk riding a trend that may run out soon. Even if the trend continues, he only enjoys a smaller profit. The bigger risk in exchange for a smaller profit is not sound trading for the long run. The ability to identify and make trades after a valid retracement will yield big profits.