Post by Bozur on Oct 18, 2008 10:59:06 GMT -5
The Number One Biggest Mistake in All of Trading
Jay Kaeppel, Optionetics.com
October 15, 2008
Let’s get back to basics this week. With all of the economic and emotional turmoil that has swirled around us in the past month I am reminded once again of the importance of having and executing a well though out trading plan. Now, over the years I have found that as soon as you mention the words “trading plan,” a lot of people automatically tune out. So DO NOT STOP READING. Most people prefer to monkey around with indicators and oscillators or to pore over fundamental data. But there is a great deal more to the process if you want to achieve real long-term success.
When a person decides to start a business there is typically a great deal of planning involved – at least there had better be if the person starting the company hopes to achieve any real success. And so to it should be with trading. The more you know ahead of time what actions you will take and under what circumstances you will take them, the greater your potential for long-term success.
The number one cause of failure for traders and investors is the lack of a coherent and comprehensive trading plan. Fortunately, for the purposes of illustrating this mistake, there is a perfect analogy. Consider the following scenario. You hear others talk of a business with low barriers to entry and in which some individuals are getting rich beyond anyone’s wildest dreams. After some consideration you decide to take the plunge and engage in that business yourself. If you are like the vast majority of people then it is a fair assumption that you will begin to do some planning before engaging in that business. In fact, if you are at all prudent the chances are great that you will do alot of planning before diving in. Furthermore, during the planning process you may learn things that you did not know at the outset that could affect your business, and you will build in contingency plans to account for these factors as well.
If you are like most people, and if you truly desire to succeed, you may find yourself becoming consumed by the depth and breadth of your planning. You may take pride in your efforts and the extent of your preparations may help you to build confidence in yourself and your chances for success. Finally after much soul searching and countless hours of planning and preparation, you take the plunge and attempt to succeed in your new business endeavor. There is really nothing surprising or unusual in any of this. It happens all the time and is simply the way that people go about making their fortune.
Except when it comes to trading.
In the world of trading, a surprisingly high percentage of new traders enter the markets without the slightest idea as to how they plan to succeed in the long run. Very few traders begin trading only after they have carefully thought through and planned their foray into the “exciting world of trading." Most are so anxious to get started that they just don’t take the time to make the proper preparations. This phenomenon alone goes a long way towards explaining why many fail to succeed as traders in the long run.
Why Do Traders Fail to Plan?
The primary reason why do traders make this mistake and fail to plan properly is simply the lure of easy money. The underlying thought seems to be “why bother planning, why not jump in and start getting rich sooner than later?” And in a way this is understandable. There is probably not a working person on this planet who never once dreamed of making some huge sum of money quickly and easily and then living a life of spoiled luxury from that day forward. And the fact of the matter is that trading in the financial markets offers just that possibility. It is possible to find any number of books written by or about individuals who have amassed incredible profits in the markets. And who wouldn’t want to achieve the success that these people have? The problem however, is that most individuals tend to focus not on the “achieving” part of the process, but rather on the “post achievement” period. In other words, if you asked the question “could you imagine making millions of dollars trading”, most people would not begin drawing up plans on how they would trade stocks, options, soybeans or foreign currencies. Most people would start drawing up a mental laundry list of all of the things they could and would do with the money. The “doing” part is not nearly as sexy as the “done” part.
The bottom line is that trading is like any other endeavor. There will be ups and downs along the way. In essence, the “ups” tend to take care of themselves (although a good trading plan can also help you to maximize those “ups”). What is real key is how you handle the inevitable “downs." The moral of the story is that even the most successful traders suffer tremendously from time to time. You will too. The real question then is “how will you react?”.
Also like any other endeavor, success in trading will (I hate to be the one to tell you) require some hard work on your part. There is hard work involved in planning and there is also hard work involved in following he plan. In the world of trading “hard work” often takes the form of making and following through on difficult decisions, rather than any type of actual physical chore. But do not underestimate the difficulty of this task.
The more prepared you are, the greater your chance of success. Period.
Putting it all Together
Last year I had the privilege to work with Mitch Genser and Clare White, both of Optionetics, on a project known as “Cornerstone." This project was Mitch’s baby and he spearheaded the entire effort. The entire thrust of Cornerstone was to walk traders through every step of the planning process and to make them think and spell out as clearly as possible what the plan was, how it worked and why a person believed that it would lead to success. From objectives to preferred strategies and markets, from money management and risk management, from market analysis and trading system development to trade entries and exits, from psychology to assessment of results, it is all covered in thorough detail.
I typically do not build sales pitches into my articles but as an instructor it is also my obligation to tell you what I think you need to know. In these difficult markets, if you are presently not achieving the success that you feel you are capable of as a trader, it may be time to take a look inside and ask yourself “what could I be doing differently or better?” If you want some help in answering those questions I encourage you to contact Optionetics and inquire about Cornerstone. Many people who have made the effort to work through the process that we laid out in Cornerstone have come away truly enlightened.
My name is Jay Kaeppel and I approve of this message.
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Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
www.optionetics.com/