Trading Mistakes

The Importance of Avoiding Errors

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The Internet is open to everyone. Unfortunately, that includes people who are after your money and it is your duty to yourself to consider the source when making financial decisions.

Don't misunderstand: There is a ton of useful stuff written by people who genuinely want to help their readers learn about the topic under discussion. However, too often the we--meaning writers offers incomplete, or insufficient information.

In other words, it may leave you under-prepared to put your cash to work.

Keep in mind, that it is your job to act responsible. When the online information is educational -- for example a trading lesson or course -- it is not the author's fault when a trader is so anxious to begin trading with real money, that he/she makes inappropriate trades before completing the lesson(s).

When it comes to trading, there is a boatload of information telling us how to make money. Much of it is bogus, and is being offered by people who want to take some of your money by selling their courses. However, there are many useful, helpful sites. Just remember this: It stands to reason that if you do not know what steps to take to earn trading profits, then there is unlikely to be any profits.

The problem is that there are too few warnings of danger, too little mention of how to understand and manage risk, and far less information on what traders should not do.

Today, I encourage you to look more deeply into following the advice that you gather from articles, blog posts, books, and seminars. When learning certain options-related lessons (such as: buy calls when you are bullish), be aware that the lesson probably does not contain important information -- such as what "not to do" and "mistakes to avoid."

As mentioned in a post on "bullish strategies for beginners," it makes a great deal of difference which call options are bought. It is so important to avoid making beginner errors, that I am making this bold statement:

Your success as an option trader depends more on avoiding mistakes than it does on making profitable trades.

Mistakes

Trading mistakes come in two forms:

  • Making a poor choice when originating the trade.
  • Failing to recognize when a position is no longer worth owning.

New traders tend to make mistakes that fall into the first category. These can be the result of an abbreviated education process or from a student trying to trade before he/she clearly understands the lessons. It is better to avoid the mistakes in the first place -- and I hope that these posts (here at blog.mdwoptions.com) help you achieve that -- but the good news is that you can learn from your mistakes and simply not repeat them. 

Almost all traders make mistakes that fall into the second category. In other words, risk management is ignored. These are the result of personality traits and psychological issues. Traders (too frequently) want to believe that the original trade was sound and that there is no reason to ever close the position prior to expiration.

It requires discipline to pull the trigger and exit a trade with a loss. Thus, stubbornness and the refusal to recognize that a mistake was made leads to further, and far more costly losses. It is one thing to (for example) to choose a strategy that fails to work as expected when the stock market does not behave. There is nothing wrong with being in that situation. However, it is something far different, and more injurious to your financial health, not to recognize when the position is not working and is not likely to work. It is a serious error to refuse to exit -- even when there is a loss. Your goal as a trader is not to allow losses to overwhelm profits. And holding onto poor positions is one way to go broke in a hurry.