I had a suggestion to write this post after my write-up on my personal "Ten Commandments" of trading. Here are a few mistakes you will never want to make. Take it from someone who has already crossed the line before you, and here to advise you that you don't want to make the same mistakes.

Our money is hard earned and does not deserve to be thrown away over preventable instances. I will list my own personal 7 sins, feel free to add or subtract from this list in the comments section.

1. Trading an inappropriate position size.
Simply put...if you risk too much, you'll lose too much. In my eyes, this is the single most important rule of trading. Risking only 1-2% of an acct value is crucial to staying in the game.


2. Not knowing when to take the loss.
If you cannot answer the questions "Where am I taking the loss," and "Where is my profit target" then stay out of the market. If you leave these decisions for later, then you will make them emotionally, which will be the worst decisions a trader can make.


3. Trading on someone else's research or recommendation.
We have all heard stock tips thrown our way. Sometimes we might even hear people throw out potential trades that they are watching and become tempted to jump in. Sometimes I throw out stocks that I am trading and I am watching. The problem is that you might not know what this person is watching for, what strategy this stock fits, or what types of efforts are thrown into their research. If you take these stocks into consideration, make sure they are trades you would have likely come across on your own by conducting your own research.


4. Over Trading
Do you find yourself taking low quality trades to be more active? Stop it!


5. Trading without a trading plan or trading rules
You have all heard this a hundred times, so hear it again. What is your approach? Why? For instance, I am an options trader. I know what signals I take, I know the types of stocks I take them on, I know when to enter and when to exit. Make sure you are this familiar with your own plan you you have a benchmark to measure up against.


6. Trading without appropriate market knowledge
Do you fully understand every element of the strategy you are trading? Pro's & con's, risks & rewards, etc. Are you placing proper emphasis on the important things (ex. price, volume, etc.) and minimal emphasis on the more glamorous but less important items (ex. candle patterns, oscillators, etc.)? Is your strategy cohesive with the market environment and with the trend and condition of the company stock? One of the worst trades I ever took was on a strategy I really knew nothing about.


7. Trading with emotion instead of discipline
Trading with emotion will bring down your empire. Understand yourself and your tendencies first before making expensive decisions. As you create a trading plan, it will help you to reduce emotion and enhance discipline. Each person is different, but we will all fall down if we don't eliminate situations where we rely on emotion to make choices. Get started right away.

Posted by Option Addict on 10/30/2006 at 10:54 AM | Permalink