The negative rub-off of housing finance scam in India and sovereign debt issues in Europe is being clearly felt by the equity markets. Indian stock markets have corrected almost 10% from its peaks over the last 1 month. In fact, the correction has been so dramatic and broad-based that almost all the stocks, including those in pronounced up trends, have plunged into deep red.
Under such circumstances, the long-term investors can stem their paper losses by holding on to their portfolio of stocks even during this steep correction, but the real hit is taken by the trading community who trade with a short-term perspective.
At this juncture of jittery market sentiment, we decided to dig deep into ‘Faulty trading Practices and Emotional Decisions’ that can lead to grave losses to the traders and consequently losing their self-confidence and urge to withdraw from trading completely as a knee-jerk reaction.
Contents
Trading without Stop Loss
Before starting with this point, my question to the traders is, “has anybody succeeded by trading without a stop loss for a prolonged period?” The answer to this is a clear ‘No’.
I always exit my trade between 1-2% when it doesn’t go my way. I also have a stop loss for the worst case scenario of about 5% from my entry point. Moreover, I think some pros don’t use stop loss when they enter, but they do have a provision for a mental stop where a trade is proven wrong. Otherwise you’re just holding on to the hope and leaving the rest to destiny.
Of course, you can always exit a trade even before your stop loss gets triggered if the situation so demands; that’s not an issue. But, having a stop loss in place is the most important part of the trade.
In short, stop loss orders are great insurance policies that cost you nothing and save you a fortune. Unless you plan to hold a stock for longer duration, you should consider using them to protect your moolah from draining you further deep into losses.
Excessive Trading
One policy that I follow religiously for my daily trades is to avoid ‘excessive’ trading. For example, I have a daily target of earning Rs.500 from my intra-day trades. If this target is achieved in the first 15 minutes of trade itself, I close my trading terminal and make myself busy with some other work to stave off from excessive trading.
The Reason: The winners are convinced that they will ride it all the way to the top and invariably give much or all their gains back to the casino if they overtrade.
In fact, the urge to overtrade is especially felt in case of traders that are reeling under losses. Despite the fact that odds favor the losing trades on a given day, traders are almost always desperate to recoup their losses.
Moreover, large and frequent short-term trades will also increase the administrative and brokerage costs. These types of trades have the potential to interfere with the efficient management of the trading expenses, including various taxes, and returns.
Compulsive Trading
How many of you are compulsive traders? Traders who are compulsive look for trading thrills, while telling themselves they are doing it to make a profit. It is nothing but a rush of adrenalin powered by impulsively market timing based on the emotional response to news events, sharp market fluctuations or simply for the thrill of the trade itself.
You might get over compulsive about trying to anticipate everything that might go wrong. You may fruitlessly try to develop an action plan for every scenario. Compulsive trading is an overpowering need and an urge to gamble; and it becomes a problem when a person engages in it on a regular basis.
Moreover, even excessive trading is a part of a broader compulsive trading disorder; wherein a trader returns to trade after losing money with a compulsive urge to get even.
Trading without a Plan
A systematic trading is a mechanical set of rules covering entry and exit orders based on pre-established and predefined plans. On the other hand, a discretionary trader relies on his judgment and can employ any number of subjective analyses to form his trading decisions.
A core trading strategy based on a pre-determined set of rules combines risk-management along with logical decision-making; while excluding emotional factor attached with your trade. A disciplined trader cares only about keeping the system he is sure in.
Systematic traders design systems that focus on staying in alignment with the underlying trend. When it comes to risk management, systematic traders also focus on price rather than noise or herd mentality.
Without a trading plan, you’ll not be able to determine whether you’re headed in the right direction. You’ll have a framework to measure your trading performance that you can monitor continually.
Withdrawal from Trading
Complete withdrawal from trading is a state of mentality where a trader has accepted defeat either on account of lack of knowledge or destiny not favouring him in his trading career. It is the last thing that a trader would want. Usually, this stage of depression is reached once a trader experiences huge losses on account of unsuccessful trades.
At this stage, a trader needs to weigh the pros and cons of his past trading practices and beliefs based on which he used to trade and account for the failures. If he runs away from trading, it would be tough for him to find his feet back on the trading terminal at a later period.
Analyse the short-comings of your trading system, your emotional involvement and fear of failure; and make necessary amendments in your trading strategies in such a manner that you can overcome erroneous actions and not repeat them again.
The best thing that can happen to a human being is his ability to correct his mistakes and not as much of achieving success; as success is only the end result. But, if the process to the ultimate goal is refined and simplistic, the success is always here to stay.
As I am writing this post, I am already done with my trades for the day in the first hour of the market opening itself. So, writing this article helps me to remain away from ‘Excessive’ trading.