Don’t Let Mental Mistakes Sink You

(Part 8 of ten-part series on Financial Truths)

Section 1: We Are All Human

Section 2: Play Devil’s Advocate

Section 3: Forget Your Cost Basis

Section 4: You Can’t Tell the Market What to Do, So Let the Market tell YOU What to Do

Section 5: Stop-Loss Orders Are Only For the Lazy

Section 6: Know When to Take a Break

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(CC image by Ben Sutherland on Flickr)

 

Section 1: We Are All Human

  • No ‘bot’ or ‘algorithm’ can come close to what a good investor/trader can achieve
  • Some high-speed trading firms do succeed, but have to spend many millions of dollars on computers and network connections to do it
  • ‘Flash crashes’ highlight the problems with pre-programmed trading algorithms
  • 2016 British Pound Flash Crash

    New Market Wizards by Jack D. Schwager

Section 2: Play Devil’s Advocate

  • Before placing a trade: visualize the market moving against you, what would that look like?
  • Could you construct a plausible alternative scenario around this?

Section 3: Forget Your Cost Basis

  • It doesn’t matter where you entered the trade
  • Don’t hang on to a losing trade because you want to “get back to even”
  • One exception: a “time-out” level based on total losses

Section 4: You Can’t Tell the Market What to Do, So Let the Market Tell YOU What to Do

  • Examine a chart without bias
  • Markets aren’t tradable 100% of the time

Section 5: Stop-Loss Orders Are Only For the Lazy

  • Stops often don’t work the way they’re supposed to
  • Other traders will exploit your stop-loss orders for their profit – “running the stops”
  • Don’t react too quickly to a breach: Watch the action around the price level
  • “Fake-outs” around commonly-known price levels

Section 6: Know When to Take a Break

  • Thinking too much about past mistakes
  • Being tempted to “double-down”
  • Exceeding a pre-defined risk tolerance

 

Intro music by audionautix.com

 

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