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Notes From The Editor

Common Trading Mistakes...And How to Avoid Them (Part IV)

Here's part IV of our ongoing series on trading pitfalls that can get in the way of your long-term success. Take heed of the following two mistakes; they're especially dangerous!

Mistake #9: Failure to control emotions

Bad things happen when emotions run amuck. A lack of control can lead to decisions that are misguided, risky, or just plain stupid. Frustration at missing out on a great trade, for example, can trigger a haphazard decision to jump headlong at the next potential set-up. Blind hope can lead to positions that are based on emotions, rather than technical merits. Greed can cause you to cast your stop-loss strategy aside, because you don't want to miss out on further profits.

The best traders are objective. Although they feel greed, fear, and hope - just like every other human on this blue orb - they don't let those emotions influence their decisions. They take a cool, calm, and collected approach. They vent their emotions in a constructive way, away from the intensity of live market action. Their heightened self-awareness insulates them from the dangers of emotional trading.

Mistake #10: Trading with money you can't afford to lose

It's a dream of many market junkies to reach the point where they can honestly say that trading is their profession. Can it be done? Absolutely. But if you're trading for your next rent check or car payment, trouble may be just around the corner.

The reason is simple, and directly related to the previous mistake; when you're trading for your livelihood, it's next to impossible to control your emotions. Fear over losing money can cause you to bail out of a position before it hits your stop. The need to make money can cause you to take less-than-ideal positions. And in the worst-case scenario, desperation can cause you to cast all risk management aside, holding on to losing positions indefinitely.

To avoid this scenario, never trade with money you need to live. If you make enough to live on your profits, more power to you! But always be sure that you have a cushion - a savings account, for example, or other sources of income. Trading can (and will) lead to occasional losses, and you should always be able to handle those losses without worrying about paying your bills.

Here's to profits,

Kent Barton
Senior Analyst

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