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Beginner Mistake

The biggest problem I have seen that afflicts new traders is a simple problem to diagnose, but takes enormous effort to fix.

A lot of new traders cannot bring themselves to cut their losses quickly. Instead they hold on to them, until that small loss balloons to a ridiculous amount. This has to do with normal human psychology, and it happens to many many people, usually in the early part of their trading career. The reason behind this tendency is not important, leave that to the researchers and psychologists. The only thing that matters is to identify it and fix it. There is a reason why the greatest traders say “CUT YOUR LOSSES”.

I see traders who acknowledge this problem, yet they still cannot cut their losses. They get paralyzed when a position suddenly moves against them, and cannot act and book the loss. Doctors, lawyers, mathematicians, all fail at this profession because in trading your performance is not just a function of your intelligence. It is a game of psychology and emotions. Accept the fact that the market is ALWAYS right. Once you let go of your ego and acknowledge the fact that you are at the mercy of the market, you will see the market with greater clarity. If you are wrong, take the loss. If you are wrong 10 times in a row, take 10 losses in a row. You want to extract a return from the market, but you must respect the market and back off when you are wrong.

It is easy to write about, but much harder to deal with when you are faced with a live decision to realize a loss on a position. Part of the problem is because many new traders have no plan. They deal with things as they come. They are trading blind, with no contingency plan. Why then does that same trader buy car insurance? or health insurance? What is insurance? It is downside protection. What is the simplest form of downside protection in trading? A stop. Every new trader should formulate a clear plan before risking considerable amounts of capital. This is not the only way to learn. Many people learn best after they get burned. Open a small account with capital you can afford to lose. You will make all the beginner mistakes, and you will hopefully learn from them.

If you study the market wizards, most of them blew their entire accounts at least once. Some made millions, lost it all, made it all back and more, and then lost it all again. How many times will it take for you to learn? If you get burned badly early on, you will be conditioned to not make the same mistakes if a similar situation presents itself again.

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