One of the most common mistakes I encounter in traders is overtrading. First, let me define what I mean by overtrading.
Overtrading - Initiating or maintaining a position too large relative to your account equity.
What is too large? In my accounts I don't like to risk more than 2% of the account equity on any single trade. I learned a while back that the worst enemy of a trader is fear (greed is easier to deal with). When you're scared, you're apt to display the following characteristics:
* Sweaty palms, a few palpitations here and there
* Staring at the ceiling at 2:00 am
* Maybe mumbling or yelling at your spouse
* calling your broker every 5 minutes during the day
* unwinding a position at a loss so you can feel "normal" again only to see it turn, right after you exit (the markets are
conspiring against you, right?)
You get the picture. This is no way to live and the best defense is to trade small. Each position you carry should seem almost insignificant. You're probably thinking "How can I make any money this way?" or "How can I do that in a "RS 50,000 account?". I'll address both these questions.
On trading small:
My thinking is that if you're a good trader with good ideas, each trade you make isn't significant. It's the sum total of a lot of good ideas over a lot of years that will make you wealthy. Everyone is wrong sometimes and what happens If you risk it all (or most of it) on a single trade, and you're wrong? If what I'm saying makes sense, then trading small makes sense. Good opportunities come along fairly often. If they didn't, then I might have a different opinion. As a professional, I would never intentionally expose a large portion of my money to one market or one trade. I always trade a variety of markets with a variety of positions.
On trading a small account: Here are some suggestions for trading a small account properly.
* Trade less number of shares
* Trade futures contracts that usually aren't as volatile as stocks
* Learn about option strategies to hedge risk
* Get familiar with vertical options spreads and ratio spreads to limit risk and volatility, while allowing you to stay in a
trade for a long period of time.
Having said that, the problem with a small account is that slippage and transaction costs become larger relative to the trading gains. This problem is eased if you trade longer term (believe it or not, I've got an opinion on that too).
Trading Rules
1. Do not be a Tradaholic.
2. You trade to make money--not for fun & games or to escape boredom.
3. Never add to a bad trade.
4. Once you have a profit on a trade, never let it become a loss.
5. NO HOPING - NO WISHING - NO WOULD'VE - NO PRAYING - NO OPINIONS - NO SHOULD'VE.
6. Don't be a one-way trader be flexible.
7. Know your risk on each trade. Trade with stops.
8. Look for a 3-1 profit objective.
9. When initiating a trade, always get your price.
10. When liquidating a bad trade, always use a market order.
11. A scratch trade is a "winner."
12. Make ten points on a million trades not a million points on ten trades.
13. Learn from your own mistakes.
14. Have a plan. Trade it. Monitor it.
15. 3 Losing Trades in a Row Rule. Stop! Take a break.
16. DISCIPLINE! 90% of the public lose without it.
17. Pay attention to weekly lows and highs.
18. "Guru" software systems make money for the sales rep. Develop your own approach.
19. Understand spreading and options.
20. Technicals and fundamentals are equally important. Trading may not be suitable for everyone. The risk of
loss can be substantial.