If there is one thing the markets have taught me over the years, it’s this: becoming proficient in markets is a continuous process and continuous processes deliver lessons continuously. Here are five lessons I learned (or relearned) in 2015:
1. Decide how your trade will end before you put it on
Since stock positions have no predetermined ending point, it’s on you to set the rules that give your positions an ending point. How your trade will end is decided before you enter the trade.
You can learn more about this concept by reading : Stock Trading 101: Learn To Manage Risk With Position Sizing
2. Exercise discipline despite your emotions
Fear and elation are temptresses, their sole mission is to convince you that trading plans and risk management strategies are for losers. If you give in to their temptation, you will lose. Exercise discipline and follow your plan.
3. Resist any desire to be right
You will be wrong in the markets more often than you are right and still win if you keep your losses small by following step 1 above. The desire to be right (a.k.a. your ego) will cause you to discard your trading plan to prove a point about how smart you are. Participating in the markets is about making money, not about being right. Following a plan and managing risk is what will make you money in the markets. If you find yourself listing up all the reasons why you are still in a position, your ego has taken over; sell and move on.
4. The term “averaging down” has down in it for a reason
A trend can only do two things when it reaches a barrier: continue higher or reverse course. Why would you buy more shares when the trend has obviously reversed? Sell and move on.
5. Price often has a memory
Pay attention to what happened the last time a stock traded at a certain level, especially a previously contested level. You will be surprised how often these patterns will repeat themselves. Pay attention to price action, it can give you an indication of what’s to come.
beginners focus on profit while professionals give attention to loss
Disclosure: the author is long trading plans & managing risk while short emotion & ego.