BY DEFINITION, TRADING is about assuming risk. Like walking a tightrope or having unprotected sex, it only takes one trading misstep to wreck your life. This is a game that should be played carefully at all times.
Although the market is always unpredictable, trading technique can be controlled. To that end, I’ve observed (and, cough cough, committed) a number of common trading traps that will doom an account regardless of what the market does. In hindsight, I’ve learned that most of the frequent mistakes are also the easiest to avoid.
As Sun Tzu observed, the battle is won or lost before the fighting even begins. If you trade for money, let me assure you that the undercapitalized trader is trapped no, absolutely doomed, from the start. It’s not that the game is rigged against the little guy, but rather that there’s an inherent cost to trading. If you have no savings, hold high-interest debt or possess only a few hundred dollars to your name, my advice would be to invest nothing. If you can’t pay, you can’t play. No matter how good your stock-picking prowess, everybody needs to have a financial ark.
The most obvious cost in trading, of course, is the commission. Even at discount rates, this expense adds up quickly for active traders. A less-often considered cost is peace of mind. Plenty of people insist on trading with money they can’t afford to lose. Because the thought of a loss is so psychologically uncomfortable, they essentially hang themselves, ending up with big losses because they were too scared to take small ones. (more…)
