The 7 Habits of Highly Ineffective Traders
Wednesday, March 12, 2008 at 10:24AM As it is, the market isn't as arousing as I thought it would be today. Like I said yesterday, if you've been on the sidelines recently; stay there. Wait for this rally to die off. When it does, start by nibbling on a few overbought downtrending stocks to get your feet wet.
Since I am holding ground today and not generating any commissions yet, I figured I would address a few things that might help to repair your trading inefficiencies. If you find yourself struggling in the market and can't figure out where the flaws are in your trading routine, here is something I have written just for you...
"The 7 Habits of Highly Ineffective Traders"
Ineffective traders fail to follow these steps, and as a result; they are not able to generate the returns they can potentially generate. Below are the 7 habits these people fail to follow; enjoy.
Habit 1: No Trading Plan
Do you know what the hell you are doing? Or better yet, do you think you know what you are doing, but the results fail to confirm your "knowledge?"
You hear this all the time, but you must have a trading plan in order to succeed. Think long and hard about this one.
Habit 2: Failure to Properly Diversify Your Funds
Diversification does not mean you take your available capital and buy 20 different stocks in various sectors/industries. It does not mean you buy 10 different stocks and 20 different call option positions in various sectors industries. It means you take your available capital...buy some stock, some calls, some puts, sell a few shorts, buy some treasuries, a few commodities, etc.
If you are an option trader, as I assume that most of you are...you take your allocated capital and divvy it up between some calls and puts; or bullish and bearish strategies. It is sad to see people depart early from their trading careers because they thought diversification meant buying call options in 10 different stocks that have no correlation to one another.
Habit 3: Lack of Patience/Discipline
Be disciplined to follow your plan, and to cut losses quickly. Be patient with trades that have not gone against you, or triggered an exit plan. Be patient and disciplined in your path to success and the process it takes to get there.
Habit 4: Under Capitalized/Improper Money Management
Are your expectations set to take this weeks lunch money and turn it into a multi-million dollar trading account? Are you being realistic about your expectations?
The truth is that it is hard to make money unless you have money working for you. I'm not saying it is impossible, but considering the laws of probability, it is likened to an out-the-money call option. Your upside is unlimited, but how likely is it to reach that upside?
Money management is the most critical ingredient to success, and if you are under capitalized, it is impossible to establish the right position size. Make sure that when you are taking trades, that you keep your position size consistent. This will help to avoid over funding losers, and under investing in winners.
Habit 5: Trying to time the market
"Since the market was down today, I am going to buy more calls. The market is going to bounce tomorrow!"
Wrong.
Generally speaking, it is impossible to time the market. Whether the market moves higher or lower tomorrow, what are you doing about it today? How are you going to take advantage of all the money that is readily available for you to withdraw tomorrow?
(If you don't know, see Habit 2)
Habit 6: The perception of patterns, where they don't exist
Price patterns are a critical element in my trading routine. It seems like many others share my sentiment. However, it is important to note that trades in the stock market are incredibly random, so the likelihood of patters existing is very low. Out of hundreds of stocks you look at, you might see 1 or 2. This is why my watchlists consist of thousands of stocks, and at the end of the week I produce a dozen or so on average. I often notice that some traders feel that there has to be a pattern of sorts buried somewhere in the chart they are analyzing; and that it is their fault that they do not see it. Remember, a pattern is something you can't help but see. If finding a pattern requires any effort; it isn't there. Most stock patterns tend to be coincidental, and any patterns that seem to exist are probably not based on any concrete facts or data. Remember to stay objective when observing stocks.
Habit 7: You Are Emotional
Can't pull the trigger? Don't know which way prices are going to move tomorrow? Missed your exit because you thought things would get better? Can't sleep at night?
By finding the solution to the previous 6 habits, you will automatically take care of the 7th. I can recall the day in my life when I was finally able to leave emotions out of trading. It was the point when I had built my account to a reasonable level, when I finally understood how to diversify, when I became patient and disciplined with my approach, when my position size was small enough that I didn't care whether I made or lost money, when i stopped trying to time the market, and when I finally trained my eye to find price patterns.
The rest is history.
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Reader Comments (126)
Thanks Jeff
Timely post as usual.
I am printing this one out for the Cover Page on my new Trading Plan as a constant remonder!
Thanks Jeff, These are usefull thoughts!
Jeff:
Thanks for the timely reminder. I think I will print this one out as well.
Thanks.
Another one for the ages.
Thanks Jeff!
I know a lot of traders will benefit from today's post. Myself included.
That was really good Jeff. Thank you.
Jeff, great post!
Now, I wonder for such bear market rallies, which is better:
buy options on stocks that has been down the most (they tend to bounce the most?) OR
buy options on stocks that have been relatively strong
Man, this is an excellent refresher post. I know for me that one thing I need to do is be much better diversified.
Really appreciate you putting this together, I'm printing this page out right now and pin it on my wall.
-Kevin from Toronto.
Jeff,
The rest is the reason we are here...Perhaps we should spend some more attention on the first 7, eh?
Great post...This one is getting printed.
Berkshire
First time poster. I have followed your site for a while and am what you guys would call a "lurker". I enjoy this site and hope to contribute in the near future. This post will really help, Thanks Jeff!
Jeff,
That is one the best post to date. Thanks for the tune up.
I think one should keep an eye on BG for a close below $94.60ish. There is a little bit of S/R from Aug 2007 at this area. $82.50ish next stop. IMO.
You must have some esp going on--this is just what I needed--this one gets printed
Thanks for all your help
Cheesehead,
We see you lurking over there quite often. Don't be shy.
Berkshire
Alfred-
Both is the answer you are looking for. Follow your rules to make that determination. I don't think that one is necessarily better than the other. You just have to do what works for you.
FXB breakout above 200 day MA.
Cheesehead-
Welcome aboard, and go Pack!
Were you as deeply saddened at our loss last week as I was?
Great article Jeff. I just also read your July 19th article "Creating Trading Rules and Trading Systems". A great companion article to this one I might add.
PRU - bouncing off resistance.
I haven't had time to read through all the posts...so I apologize if someone already caught this one....
Jeff,
Another great post! One that I need to look at often. I need to search the website for some pointers on money management. Thanks
Jeff,
Thanks for that. Just saved to my desktop. You, and all OA's on this blog are such an inspiration!
Onward and Upward
Dave
I should print this out as well. Thank you.
Now I'll go stand in the corner because I am guilty of some of these sins.
What does everyone think about these potential breakouts that really didn't confirm yesterday? Like TSL, OSIP, VARI, and LNG?
Still a potential breakout outcoming? or are they done?
Who called PCP yesterday. Just want to say thanks.
Dave
Great post!
When you talk about being under capitalized, how much would that be?
i go away and do my job for a few days and this is what the market does! arg... oh well. good thing is set my limit price for ESRX before hand :)
Dweeks--I will have to speak up and take credit for PCP. I am glad I hanged in there. This time hope paid for itself. Not to often that happens.
SpartaChris, Yes, very much so. My 11 year old son is named Brett. I have been a fan for a very long time and actually was at the NFC championship game in January. Are you in Sparta?
Thanks Jeff,
Just what was needed.
Doug,
Thanks. I bought Mar 95 put this morn. I'm a 1 contract at a time type for now. I'm a little worried about time decay on this. Maybe I should've spent more and got the April's
Dave
Dweeks-
But I also mentioned CTV and it ain't looking too good. $37.50 was broken yesterday mid-day and it reversed and closed above $37.50....bounced hard this morning.
Does anyone see resistance on BIDU at $277.50 to $278.00 ?
I'm on Oceanside, CA. SpartaChris is just a clever nickname. =)
And yeah, my heart totally broke last week. But it's done so I guess it's time to move on. I was fortunate enough to get to see him play a couple of times though, so for that I'm greatful!
Anyway, sorry for the OT posts everyone. We cheeseheads gotta stick together!
Doug,
Good call on PCP, wish I had gotten in. Send me your chart on PCP when you get a chance. Thanks
Idea
A Game/Quiz/Trivia/ something centered around Technical Analysis, Sector Analysis, whatever, something we can all participate in, something that would generate friendly competition,
Not that I want to create more work for our already spread way to thin mentor!
thoughts?
Jeremiah
Those are some big fat shooting stars sitting at resistance on the indicies. It will be interesting to see if the bulls come out later today.
Great advice for the one who doesn't stick to their trading plan! We've all been there
The oil refiners dropped another 10% this morning on a downgrade.from a small broker. They appear to be approaching oversold conditions. Refiners are entering the most profit quarter of the year and gasoline supplies appear to be tightening as evidenced by the pump prices.
Consider FTO and HOC.
on = in*
ENR falling through support.
OK Jeff .. another great one ..
Take this ... add it to the Greatest Hits ... Then shop it to a publisher - Title the book.. "The Option Addict Handbook" and then kick back ... drive your Tahoe, play with your kids... and oh yeah ... continue to post this kind of stuff on your blog ...
Great refresher .. thanks for it....
David in NH,
BIDU is definitely hitting resistance at the 280 area. That being said the volume may push it through in the short term.
BMRN is begging everyone to buy puts on it.
Jeff-
Timely as ever!
Thanks,
liz
anybody got any bullish ideas out there?
Cole, I dont know if you have an entry for this type of play, but NEU is breakout over the previous high close.
Thanks Jeff
Love it!
Lazzara
BHI will you kick me in the nutz once again? We shall see.
Anybody like where kbh is sitting. Right at EE for me...resistance around 23.40.
Jeff,,
I hope you never get tired of us,,, something inside you helps you be a "GIVER" ,,, and I hope that never goes away and you keep on keeping on,,, knowing there are those out here you will never meet and yet you find it in yourself to be a "GIVER",,, thanks for all your valuable time and wisdom,,,