1. The Desire to be Right
This is the most prevalent reason for the destruction of traders. Everyone is interested in being right all the time, investors, market gurus, analysts and other pundits are obsessed with guessing correctly the next move. You can literally feel the adrenaline flowing through your body, when you call a stock and it shoots straight up. You don’t care about exiting the trade, or moving your stop-loss, you are just floating in the moment, enjoying the praise and awe of others. If you got into trading because of this feeling, you won’t make much money. In fact, you will lose everything you got. When you make a correct prediction, but you don’t take your profits, or you put a small amount into the trade, what good is it for? On the other hand, if you are right most of the time, but one trade wipes out your capital, what’s the point of trading, do you enjoy gambling so much?
I couldn’t care less if I’m right or wrong, the only important thing in trading is, how much money I make when I’m right, and how much I lose when I’m wrong. The sum of these two is my profit. Chasing a high win ratio doesn’t make sense and leads to the second most common mistake.
2. Cuttting Winners short and letting Losers run
The desire to be right is so strong, that it leads you to take profits quickly, because you are afraid the trade will turn back down and become a loser. Also, you try to pretend your losses don’t exist, hoping they will turn back up and prove you were right once again.
When you make a dollar 9 times out of 10, but lose 10 dollars on the last trade, you are losing money despite being 90% right. If I make 3 dollars on every profitable trade, and lose 1 dollar on a bad one, I can be wrong 70% of the time and still make 2 dollars of profit. Big money is made by portfolio concentration and large trends, if you take profits quickly, you will never catch these gains. Consequently, holding your losers destroys your capital over time and prevents you from participating in other more profitable trades.
3. Being a “News Junkie”
All traders and investors are led to believe, that watching stocks in their portfolio or CNBC news the whole day will give you an edge. That by looking at the same information that millions of people have already seen, you can glean a profitable idea that others have missed! Wake up. Doing that every single day is a huge waste of your life and energy. 95% of time there is absolutely nothing to be seen, and even if there is some big news, the stock prices will react far more quickly than you ever could. The things you read in news are useless, written after the fact, and will only hinder your trading or investing performance. Most of the analysts or financial commentators are amateurs, who just try to explain why the stock market went up or down today. They have never owned stocks and I bet their money is parked in a checking account. Warren Buffet summed it all up: “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway”.
By being glued to a screen all the time, you are missing out important long-term fundamentals of your stocks or the market as a whole. You could be studying investments, doing sports or spending time with your family. Instead, you become obsessed by meaningless short-term movements and start to trade in and out of positions, generating losses and destroying long-term returns.
4. Impatience
Have you ever bought a stock, sold it few days or weeks later for a quick profit, and later watch it become a multibagger? Did you ever stop and think, that holding your stocks longer would generate a much higher return than trying to make a quick buck every day? All you need for success in investing or trading is a few big ideas and the patience to sit tight and let them run. Every trader goes through many small losses, but missing a big move is much worse. Remember Jesse Livermore: “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
5. Successful Trading is About Making Money, not Having Fun.
Every trader or investor enjoys the feeling of making money, but If you fail to keep emotions out of this, you won’t be left with any money at all. In fact, you need to learn to turn your excitement completely off and focus on trading. Each one of us needs to go through a very painful process to develop iron nerves and ego control and only after that we are able to achieve high profits. This means, that you need to have the discipline to do nothing. In other words, you have to sit and wait for the best opportunities, while others are having fun. As George Soros said: "If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring."
The only important figure in this business is your overall performance, your profit. It doesn’t matter how many of your calls were correct, nobody cares if you predict the next big crisis or if you picked a stock that went up 200%. The only thing separating professionals from amateurs is long-term profitability.
This is the most prevalent reason for the destruction of traders. Everyone is interested in being right all the time, investors, market gurus, analysts and other pundits are obsessed with guessing correctly the next move. You can literally feel the adrenaline flowing through your body, when you call a stock and it shoots straight up. You don’t care about exiting the trade, or moving your stop-loss, you are just floating in the moment, enjoying the praise and awe of others. If you got into trading because of this feeling, you won’t make much money. In fact, you will lose everything you got. When you make a correct prediction, but you don’t take your profits, or you put a small amount into the trade, what good is it for? On the other hand, if you are right most of the time, but one trade wipes out your capital, what’s the point of trading, do you enjoy gambling so much?
I couldn’t care less if I’m right or wrong, the only important thing in trading is, how much money I make when I’m right, and how much I lose when I’m wrong. The sum of these two is my profit. Chasing a high win ratio doesn’t make sense and leads to the second most common mistake.
2. Cuttting Winners short and letting Losers run
The desire to be right is so strong, that it leads you to take profits quickly, because you are afraid the trade will turn back down and become a loser. Also, you try to pretend your losses don’t exist, hoping they will turn back up and prove you were right once again.
When you make a dollar 9 times out of 10, but lose 10 dollars on the last trade, you are losing money despite being 90% right. If I make 3 dollars on every profitable trade, and lose 1 dollar on a bad one, I can be wrong 70% of the time and still make 2 dollars of profit. Big money is made by portfolio concentration and large trends, if you take profits quickly, you will never catch these gains. Consequently, holding your losers destroys your capital over time and prevents you from participating in other more profitable trades.
3. Being a “News Junkie”
All traders and investors are led to believe, that watching stocks in their portfolio or CNBC news the whole day will give you an edge. That by looking at the same information that millions of people have already seen, you can glean a profitable idea that others have missed! Wake up. Doing that every single day is a huge waste of your life and energy. 95% of time there is absolutely nothing to be seen, and even if there is some big news, the stock prices will react far more quickly than you ever could. The things you read in news are useless, written after the fact, and will only hinder your trading or investing performance. Most of the analysts or financial commentators are amateurs, who just try to explain why the stock market went up or down today. They have never owned stocks and I bet their money is parked in a checking account. Warren Buffet summed it all up: “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway”.
By being glued to a screen all the time, you are missing out important long-term fundamentals of your stocks or the market as a whole. You could be studying investments, doing sports or spending time with your family. Instead, you become obsessed by meaningless short-term movements and start to trade in and out of positions, generating losses and destroying long-term returns.
4. Impatience
Have you ever bought a stock, sold it few days or weeks later for a quick profit, and later watch it become a multibagger? Did you ever stop and think, that holding your stocks longer would generate a much higher return than trying to make a quick buck every day? All you need for success in investing or trading is a few big ideas and the patience to sit tight and let them run. Every trader goes through many small losses, but missing a big move is much worse. Remember Jesse Livermore: “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
5. Successful Trading is About Making Money, not Having Fun.
Every trader or investor enjoys the feeling of making money, but If you fail to keep emotions out of this, you won’t be left with any money at all. In fact, you need to learn to turn your excitement completely off and focus on trading. Each one of us needs to go through a very painful process to develop iron nerves and ego control and only after that we are able to achieve high profits. This means, that you need to have the discipline to do nothing. In other words, you have to sit and wait for the best opportunities, while others are having fun. As George Soros said: "If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring."
The only important figure in this business is your overall performance, your profit. It doesn’t matter how many of your calls were correct, nobody cares if you predict the next big crisis or if you picked a stock that went up 200%. The only thing separating professionals from amateurs is long-term profitability.
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