The biggest mistake that beginners make, especially when they win for a period of time is thinking that the market is going to stay in the same character and they can always keep winning with the strategy that is working. Sadly, this is not the case. Just when that trader feels most comfortable and decides to “go big” is when the market will change character and the losses will come. This mistake was my first $5000 lesson in the markets. I say “lesson” because once you actually do lose money, you don’t tend to forget it.
A mentor of mine, Doc Severson of Options MD, once told me that “great traders learn by getting killed, getting back up, dusting themselves off, and then vowing never to die that way again.” He could not be more correct. The market is riddled with the stories of great traders who lost it all or made the big bet and lost.
The best way to avoid this mistake? Never take the market for granted, invest with a plan, and be very wary of the little voice in your head that says, “Everything is going great, the setups are perfect, triple the normal position size, and let’s really make some money!” It is always about that time that the market changes and so does your ability to win.
Investing in the market is an exercise in self-control and the balance of emotions over logic. You have to stay grounded and always remind yourself to think “logically.” You have to think through your moves and not let the emotional side affect your judgment, especially when things are not going your way. No matter how successful you become as a trader, this balancing act is never over and will be something you will want to be conscious of your whole trading career.
The second mistake that beginning traders make is not establishing rules set and thresholds. This is the mistake that I was most guilty of and still have to remind myself consciously to avoid. I am an entrepreneur and have built the success of multiple businesses because my partners and I were willing to take risks to make things happen. As I have found, taking a risk in building a business is much different than taking a risk in the market. When you take a risk in building a business, you have a lot more control over the outcome because you and those involved with you have the ability to affect the outcome. You can work harder, you can meet with potential customers face to face to get a “big deal” done, you can find other partners that can help you achieve your goals, etc.
In trading, you do not have the above luxuries. Sad to say, but retail traders have very little way to affect the outcome of a trade. What they have the ability to do is put the odds on their side and mitigate their risk by working a good strategy and having defined rules and thresholds that they will follow.
You never “win” a trade once you are in it…you win the trade by managing your risk and defending your position. This is especially true for options traders as we only have a finite time to make our money. There is an expiration on our trades and we will either make our money during the time allotted or we will lose.
So why the rules, thresholds, etc? Well, as you will find, many times traders have a chance to make a profit during the cycle and “want to hang in there” for even more profit and then they lose. It is rare that most options trades go until expiration. Without rules sets and thresholds, it is very easy to make the mistake to stay in too long or worse, get in a large losing position on the trade.
Rules and thresholds help you to mitigate risk. Face it, there will be trades that you will lose, but with good rules and thresholds that stop you from taking a full loss or that allow you to lose a small amount but still stay in the game, you have a much better chance at winning over time.
As I said earlier, this is where I made my biggest mistakes. I thought that I could manage by trading business like I did my other businesses and thus would take on more risk. I had rules sets, but would let trades go outside of them…because there was a chance that “I could win it and I was willing to take the risk.” Like many other traders have found from the same experiences, I got burned and it took me a long time of diligent, rule based investing to make the losses back.
Nowadays, I still battle this emotional vs. logical process when it comes to my risk rules and thresholds as I will always be the entrepreneur. I have just gotten a lot better and have learned to control this side of my trading. I would rather make some profit, than lose on a gamble!
Make sure that you have defined rule sets and thresholds of when to get in and out of your trade. Before you make the trade, no where you will take profits and how much of a loss you will allow and then stick to it!
As stated at the beginning of this article, trading the markets is an exciting experience and can create wealth for you. By learning from the mistakes of others and finding good mentors that can help you along your way, you will find success that much faster. Always remaining diligent, learning from your mistakes, having a plan for your trading business that balances logic vs. emotion, and utilizing rules sets and thresholds will help you to win over the long run. Here’s to your trading success!