35 Top Destroyers of Trading Capital

 

When I asked my Facebook trading group what was the cause of their biggest trading losses, no one had any trouble remembering those painful and valuable lessons. These top 30 insightful answers will benefit new traders and provide a nice reminder for those with more experience.

“What was the cause of the biggest draw downs in your trading accounts?”

  1. Having no exit strategy
  2. Being certain of your opinion on the direction of an asset
  3. Arrogance that you know how the trade will turn out
  4. Thinking that you are invincible
  5. Over-trading
  6. Believing that the market must go down based on a guru’s prediction
  7. Letting a guru convince you that you shouldn’t place a hard stop, but to wait for a reversal
  8. Incorrect position sizing
  9. Greed that causes you to trade too big and risk too much
  10. Margin
  11. No Hedges
  12. Not understanding that a Bull Market has ended
  13. Poor risk management
  14. Not knowing that earnings were about to come out on your stock
  15. Your ego takes over your trade
  16. You decide not to take your initial stop loss
  17. Believing a losing trade just has to reverse
  18. Buying a stock because it is a ‘value’ that drops another 50% from your entry
  19. Trading without a positive expectancy model
  20. Trading options without understanding how to place stops or use proper position sizing
  21. Thinking it “Has To Come Back”
  22. Buying and hoping
  23. Trading with no plan
  24. Not having trading rules for your system
  25. Not following your trading rules
  26. Averaging down
  27. Trading without an edge
  28. Keying error on the trade
  29. Not placing a stop
  30. Trying to out-guess the market
  31. Trading illiquid options
  32. Fighting the trend in your time frame
  33. Not fighting the natural impulses of greed and fear
  34. Using emotions for trading signals
  35. Using greed for position sizing

Thanks to all the members of the trading group that shared their wisdom!

These 35 things can cost a trader a lot of money. If you are able to avoid these errors, you will find yourself on the right side of your trades, with the money of less educated traders filling your account. Trade well.

Turkeys & Risk Management

http://whywereason.com/tag/nassim-taleb/

There is a story in the book Anti-Fragile  of a turkey that is fed for 1,000 days by a butcher, and everyday, confirms to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. So it’s fed for 1,000 days until maturity. Fatter and fatter. On the day when its comfort will be at its maximum, there is going to be a surprise. There will be a surprise for the turkey.  There will be a surprise for the turkey’s economics department, all those Ph.D.’s. But it’s not a surprise for the butcher, is it? Not a surprise for humans. It’s a surprise for the turkey. So the whole idea here is we are not to be a turkey. – Nicolas Taleb (Charlie Rose Interview)

Traders can fall into a complacency trap when making consistent money, using a particular system or method. As they continue to win, and their confidence grows, they can start to trade larger position sizes—soothed by their own success, these retail investors and money managers may lose site of the nature of the markets.

Success during a certain type of market environment does not equate to trading skill.

When the trader is at the peak of their confidence, and has their largest position size, is usually when the top is in. The market will suddenly change, and the system will fail. Whether it is a single day of ruin, or it takes a year or more, this is when the inexperienced or arrogant trader begin to give back profits that were gained in a climate of randomness and luck. The traders that embrace risk management and remain flexible to the markets will always come out ahead in the end.

Don’t be the turkey.

Capital Preservation: 10 Trading Tips

 

As a trader, your #1 goal is to keep your current trading capital safe and secure. Your goal as a a trader is to make money and not lose money. Many new traders lose their trading capital in the first year, but these ten tips will help you keep your capital intact so you can make it grow.

  1. Do not start trading until you have fully educated yourself. Trading tuition is expensive when you trade first and learn later.
  2. Do not trade an account so small that commissions will end up being a big drag on your returns.
  3. Do not trade until you have a well developed trading plan.
  4. Trade a position size that does not cause your emotions to become so loud you can’t hear your trading plan.
  5. Only trade in markets you fully understand.
  6. Only take valid entry signals and do not chase. Let your entry point trigger first.
  7. Only trade in liquid markets so bid/ask spreads do not devour your account.
  8. Never risk losing more than 1% of your total trading capital on any one trade through proper position sizing, and by placing stop losses at the correct price levels.
  9. Never expose your total trading account to more than a 3% loss of total trading capital at any one time, on one day.
  10. Never move a stop loss. Take the exit the first time it is triggered.

Starting a Trading Business

 

If a new trader wants to be a successful, they will need to treat their trading like they would operate a profitable business. Many traders lose a lot of money by approaching trading like it is a hobby. In trading, making money is the goal, and must be kept at the forefront of a trader’s mind if they are to be successful. Fun and excitement in trading can be expensive entertainment. The reality is that most of the time, trading is boring. A trader must treat the market like they would any other business, utilizing discipline and great care to grow their capital and be successful.

  1. You can’t open your trading business until you have a full business plan.
  2. Your inventory is your current positions; you have to buy them for less than you intend to sell them.
  3. Your customers are who you sell to; they have to be willing to pay more than you bought your positions for.
  4. Your mind is the manager of your business; you can’t let pride, fear, or greed lead to an unprofitable mistake.
  5. Your business must have insurance to manage risk. Stop losses and hedges are your insurance against big losses.
  6. Location is everything. You must conduct your business where there are ample buyers and sellers so you don’t get stuck with positions that no one wants.
  7. Your current positions are your employees. You have to keep the ones that produce gains, and fire the ones that lose. 
  8. Expansion of your business can only happen after your first location is successful. Once you have mastered a system of entries and exits you can add new markets and systems.
  9. Your trading capital and your positions are your inventory. Lose that and you are out of business.
  10. The only reason to be in business is to make money. If you don’t make money, you need a new business plan.

8 Easy Ways to Blow Up Your Account

 

Almost everyone has read the statistic that 90% of active traders are not profitable and eventually quit trading. While I don’t have the exact numbers, I suspect that a lot of those traders blow their entire trading account before they quit. Even many legendary traders like Dan Zanger, Nicolas Darvas, and Alexander Elder lost a lot of money before they were millionaires. A new trader is like a 16 year old with a car; you know that eventually mistakes will be made, and you just hope that the mistakes are not too dangerous, or that they don’t cause any long term discomfort.

During the first year, the new trader needs to focus on learning and not trading. Why would you trade before you know what you are doing? When a new trader begins to trade, they should start small to avoid letting their decisions become influenced by emotion. When the trader gets up to speed, the focus should be on what can be lost more than what can be made. The new trader must learn what they should be looking for before launching directly into trading. Their focus should be on methodology, entries, exits, risk management, and a well researched trading plan.

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Of course there is also a quick and easy way to just blow up a trading account. I do not recommend these paths to destruction.

  1. A losing trade? No Problem just keep adding to it until it comes back. It will eventually come back, right?
  2. The bigger the better; if you are right, you can make a lot of money, as long as you are never wrong.
  3. Short bull markets and go long in bear markets. You can pick all the right reversals, right?
  4. You are smarter than the market. You are so special you can predict the future. Trade your predictions, they have an edge, right?
  5. Be stubborn with losing trades. The losses can’t get too big, can they?
  6. Cut winning trades short while the profits are there. Can big losses and small wins lead to profitability?
  7. Follow someone else in their trades, not knowing their position size or stop losses. What could go wrong? 
  8. Spend a ton of money on snake oil salesmen that promise you the Holy Grail of trading. I wonder why these can’t lose money machines are so affordable?