2 Simple Reasons Why Traders Go Broke
Trading and investing successfully in the stock market is not a simple feat. Those who think it is easy will certainly be taught a lesson by Mr. Market. However, that is not to say it can't be done. After trading stocks personally for just over a decade, I have witnessed first hand many of the pitfalls which catch the newbie and experienced traders off guard, ultimately costing them money. Avoiding these pitfalls and ensuring that you are aware of what it takes to win in the trading and investing arena is paramount. Below I will describe two simple, yet powerful and often overlooked reasons why many traders get their butts handed to them by the markets...
1) No Defined Strategy
Trading without a defined strategy is like showing up to a machine gun fight with a butter knife - do I need to tell you the outcome? Your defined strategy should be what guides you and allows you to make decisions based upon it, as opposed to being influenced by hype or outside noise. Consider this, without a defined plan for exiting a position, if the trade moves against you, emotion may come into play or you may second guess your "reasoning" for taking the trade in the first place. Once you welcome emotion/hype into your trading strategy, as opposed to rules based reasoning, you are sure to fail. Unless of course u get lucky here and there... but luck is certainly not a sustainable strategy for consistently profiting. To get to the point, I will speak on my strategy quickly. I trade based on technical analysis which is the method of using charts to determine where to buy/sell. I study the charts and locate the optimal levels for buying, selling, as well as how to manage a position while entered. This strategy allows me to determine the risk/reward of the trade BEFORE I enter it. If you did not get it, that last sentence was a powerful one... you must ALWAYS know how much you are willing to risk or earn BEFORE you take a trade, and having a defined strategy will help you answer that question. It will also help to alleviate much of the emotional aspect which can drain your account like crackhead in desperate need of a fix. Do you understand the severity of this simple premise?
2) Abide By Your Strategy
I could sum this up very simply with this one example... how many times have you told yourself that you will exit a losing trade at a certain level, yet when that level is hit, you decide to hold on longer? Once you make that decision to continue holding while it moves against you, you know what happens next... the stock continues lower. How many times has that happened to you? In my early years, I will admit that it happened a lot and cost me a ton of money. But wait, it gets worse! If I really felt like throwing more money away (because it was fun, but not really)... when some of these positions went against me, I bought more, all while the stock continued its downward ruin. If you have ever been caught in that same situation more than once, comment with your experince. The only difference from those years of the past to now, is that I know EXACTLY why I allowed that to happen back then; it was because I did not follow my strategy. Fast forward to today, I constantly reinforce these two simple principles and ensure I abide by them; I follow my strategy and I stick to it! When I step into the most competitive arena that is the stock market today, I have a rocket propelled grenade launcher instead of the butter knife I yielded in my early years. The weapon you choose and how prepared you are, is your decision.
To sum this up, prior to entering any position, be it stock, futures, forex, commodity, anything, you must have a plan. For example, if you are trading based on the technicals of a chart, then you should have calculated your stop levels for both gain and loss PRIOR to entering the trade. Why would you ever consider buying a stock without knowing exactly how much you are willing to lose and gain before entering the position? Studying and analyzing the technical support and resistance levels of a chart will guide you and reveal if a trade has good risk/reward. Once you have located your support/resistance levels, considered the risk/reward factor and you have supporting reasoning for entering the trade based on a strategy, you must abide by your plan! Doing so will eliminate the emotional aspect of trading and allow you to act as machine like as possible, as opposed to an emotional human being influenced by outside factors and noise.
ALWAYS abide by your levels: If your predetermined stop level for a loss is hit, then EXIT the position. If you profit target is hit, take profits! Do not change the rules during the game, that is a sure fire way to lose money.
Personally, I trade based upon a strategy created by my two partners at InTheMoneyStocks. They have well over 2 decades of trading experience and for someone new to this game, having a successful mentor is one of the few ways you can increase your odds of success while avoiding the pitfalls that constantly take the amateurs money. This has allowed me to understand what it takes to be a successful trader and implement it in my personal trading, with a high rate of success. While I am no genius, I understand what it takes to profit from trading, I know you can too. Whatever you do, or however you choose to trade, always consider these two very simple steps. Your sanity along with your trading account will thank you.