What’s the biggest mistakes that stock market investors make?

Posted By Scott Philips On Wednesday, December 21st, 2016 With 0 Comments

Though there is a litany of things that beginner traders do wrong, there is one thing that stands out above all others, that is the derivative of other problems and mistakes.

They enter the markets without sufficient preparation.

Imagine if I handed you a scalpel, walked you into a hospital ward, and said “This surgery gig is great! You can make heaps of money, look at that surgeon over there – he just arrived at work in a Ferrari! Let’s just get you a random patient to get started on, I’ve got your “Surgery for Dummies” book with me, now get started and don’t forget to remember me when you’ve made millions”.

Surgery is HARD (my father is a Surgeon, and it took him many years to just be competent, and many more to actually be good). Trading is hard too, and because of the Dunning-Kruger effect we think we are actually better at it than we are. I thought I was a pretty good trader after a few years, and objectively I sucked out loud! That would be why I still lost money then. Now I know that I am at least competent, because my last losing year was 2010.

Learning to trade should take at least several years of full-time work. Along the way there are a number of beginners mistakes which are practically rights-of-passage to becoming a real trader.

  • Trading off news – my old mentor Ed Seykota famously said “file the news in the trash” as a key component of his trading system.
  • Building a narrative to support pre-existing views (for example the zerohedge view that the Central Banks have ruined the world and there will be blood prices to pay) and ignoring the objective evidence that opposes it. This is called confirmation bias.
  • Not using stops, or using mental stops
  • Watching the market all day which to your subconscious is like making a continuous stream of decisions, hundreds or thousands of them a day. When time comes to make a real decision you are emotionally fatigued.
  • Putting too much emphasis on tape reading, or technical analysis ability. Most professional traders are not as good as many amateurs in this area, and most amateurs think that by just getting better at technical analysis, they will mysteriously evolve into professionals.
  • Not being willing to exit a losing trade (even 5 years since I’ve done this last, even typing it brings a pain to my stomach)
  • Acting off “tips” or “guru’s” of one stripe or another
  • Believing that X, Y, or Z method has the ability to predict the future (Wave, Gann, Cycles, Sunspots, Phases of the moon… all complete garbage, objectively)
  • Not trading an objective edge in the market – which is why there are no books on the “mental game” of surgery. Unless you have a positive expectancy in the market you are going to lose.
  • Not having a business plan that includes when to take profits, when to pay taxes, when to pay yourself a wage, and at what drawdown to lower size and then stop trading.
  • Not keeping accurate records (not broker statements) and taking the time to revisit every single trade ever taken after the heat of battle, looking for ways to improve, or things which could have been done better.

Learning to trade properly involves:

1) A system which suits your market beliefs, personality, lifestyle, and investment goals

2) That system must have an objective edge

3) That system has to be traded at a high degree of efficiency (very few mistakes)

4) Regular records must be kept and periodic reviews (daily, weekly, monthly, quarterly and yearly) must be done for learning purposes

5) The system must be part of a business plan that treats trading like a business.

All these things are fairly straightforward, and an interested amateur could brute force his/her way through them, and yet invariably beginner traders just “try their luck” before they have taken sufficient preparation.

These are, in my opinion, the biggest mistakes beginner traders make.

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