Many times the mere fact of knowing something that we should not do is of little use. The human being needs to previously experience the error to assimilate it. Since childhood they tell us: “don’t do this” and we quickly do it to realize that our parents were right. However, it never hurts to remember the most common errors when operating, when we trade. All of them have been committed by me, and I wish you could skip one or more than one:
- Underestimating the potential risks and overestimating the expected benefits.
- Search for the chest of Diamonds (the wheelbarrow that I call).
- Insufficient initial capital.
- Excess operations or in other words overtrading.
- Excess time spent in front of the computer.
- Excessive size of our operations.
- Believing blindly in strategies without first testing them.
- Overconfidence: I’m Tarzan’s Mom!
- Cut the profits, let the losses run.
- Average down.
- Lack of discipline in the execution of the trading plan.
- Trading like playing, instead of treating it like a business.
Underestimating the risks and overestimating the expected benefits is a typical mistake of the early stages of the trader. Optimism is a feeling that helps us cope with the bad times in our lives and allows us to keep hope alive in our daily activities. In fact, I am passionate about optimism, I think that we take many things too seriously, we only think of the worst that can happen and we forget the possibilities that can occur in any supposed setback. But this feeling plays a trick on us in trading. The human being is optimistic by nature and before trading we must be pessimistic and weigh risk management above possible benefits. If we approach trading with high levels of optimism, our natural tendency will be to underestimate the risks and overestimate the benefits. You have to take care of the risks when operating and the benefits will come. Two very interesting phrases about the importance of taking care of our losses are the following:
“It is always tempting to ignore the risk and focus exclusively on the benefits. A good trader should not fall into this trap. There are no guarantees of success in any futures trading strategy and any method based on hope and not on realism is bound to fail.” Nauzer Balsara
“It’s amazing how much money you can make if you learn not to lose it. Obsession with winning is the perfect path to disaster.” Michael Duvan.
Regarding error number two “Diamond chest search” –trolley of €500 bills- let me share this wonderful suggestion of Charlie F. Wright:
“Their goal is to be an expert on a particular indicator. Most people spend a lot of time in the process of finding the best indicator. When the one they had stops working, they start looking for another one. You must avoid falling into this trap; Select an indicator that you know the type of market action you are trying to capture and make sure you are comfortable with how it works.”
This search for easy or fast money in the stock market usually begins with the search for the perfect indicator in an initial phase, to later become the search for the perfect system. Instead of investigating the development of your system, we dedicate ourselves to looking for the best, the perfect system that will never arrive because it does not exist. All this becomes an absurd and unnecessary search that diverts us from our true path. Until in the end we drop the towel and forget about trading. Regarding error number 6: Excessive size of our operations, it is necessary to remember that the size of our positions must always be in line with our capital. This problem appears more frequently when we talk about leveraged products, such as futures. Leveraged markets offer us a very attractive operation, since if we have discipline and a good method we can get a large capital; but you also have to be careful: if the trade is losing, the leverage effect can destroy your account. Another important mistake is to start operating with a system or work rules that have not been sufficiently tested. There is no excuse for this tremendous mistake. Generally, we tend to think that those concepts that everyone repeats or that we hear from the experts are true, without stopping to verify that they really work. What I really need is a way to evaluate the performance of the system or method over as long a period as possible, known in the trading systems industry as backtesting. I end up with 3 great quotes, with a lot of message and background, from 3 teachers: Alexander Elder, Peter Aan, and Ryan Jones. I wish you much success in your trading.
“Trading seems terribly easy. When the rookie wins, he feels elated and invincible. Then he takes too many risks and loses everything.” Alexander Elder
“Trading the futures markets is like being tied to a chair while thousands of dollars fall from the sky. You try to catch them but in the end they end up falling to the ground. The potential is so incredible that you end up blinding yourself. Just with the range of the S&P 500 we could double our capital every two to three weeks. “ Peter Aan “Trading is a game of risk and reward. It is also a game that does not forgive those who approach it without knowing the rules. For those who approach it with a get-rich-quick mentality, failure is guaranteed.” Ryan Jones