1) Having No Plan or Money Management
Don’t Forget Your Money Management
When entering a spread bet, make sure that you: Enter blindly and you should expect to stumble.
2) Homework Pays DividendsThis links back to the above point about planning.
I believe it was US president Thomas Jefferson who originally said “the harder I work, the luckier I get” – wise words indeed.
When it comes to trading, the immediacy of pressing a mouse click and being able to trade can lull new traders in to a false sense of ease.
Successful trading is hard and, it has to be said, has one of the lowest success rates of many an endeavour
To tip the odds in your favour, be diligent in your research, sceptical of ‘tips’, adhere to sound money management principles and play the long game.
3) Over Exuberance and Excessive Pessimism – Avoiding GroupthinkAlan Greenspan, ex-Chair of the Federal Reserve, coined the phrase ‘irrational exuberance’ in relation to investors’ herd-like behaviour during the latter part of the 90’s.
The proliferation of bulletin boards and the ‘enthusiastic’ (to be polite, some would say ‘ramping’) posts of many commentators on these can whip traders long (or short, if there is all pervading bear sentiment) into a cemented mindset.
Witness the blind buying of anything dotcom related in the early part of the millennia with an almost cult like belief in the value of those stocks.
It is all too easy when you have a particular view to seek re-affirmative views amongst fellow investors and thus get wrapped up in that view with no heed being paid to alternate standpoints.
As a trader you must be careful of this and check yourself with regards to having an entrenched viewpoint.
I remember the early stage of the global stock market rally in 2009 where there seemed to be so much bad news around that very few people participated in that explosive rally.
The press and bulletin boards were full of people ‘scratching their heads’ as to why prices were rising – this is a good example of a proper contrarian trade and when the ‘group think’.
4) Think the ImpossibleThe market invariably will do this much more frequently than you would ever believe possible
This is one of my favourite sayings and it requires simply a reflection of that statement.
Basically, an awareness that frankly anything and everything can happen in the markets is a good mental base to start from.
It forces you to address your risk parameters and not believe that just because X has moved 20% that it cannot fall another 20% in the immediate term.
5) Think When You Take ProfitsToo many traders, myself included, rush to take profits particularly where there has been a significant move in their favour.
From my own experience, when a stock moves sharply very quickly, there is generally a ‘basis change’, i.e. some fundamental news that causes investors to re-assess their view.
Very rarely will a stock give back all the gains/losses (if short) and so, what I have learnt to do, is to close half the position and run the balance – it takes a good degree of emotion out of the trade as it has already ‘paid its toll’ as it were and you are mentally able to run the remainder of the position, perhaps with a wider trailing stop too.
In essence, you have turned the psychology of trading in your favour with such a strategy.
Remember: Spread betting, CFDs and forex trading carry a high level of risk. You can lose more than your initial investment. These products are not suitable for all investors. Only speculate with money that you can afford to lose. Make sure you fully understand the risks involved and seek independent financial advice where necessary.