THE ODDS ARE AGAINST YOU – BUT THEY DON’T HAVE TO BE
“Unless you can watch your stock holding decline by 50 per cent without becoming panic-stricken, you should not be in the stock market.” — Warren Buffett.
Despite all the fancy tools available to traders, the fundamental analysis and the different techniques of price and volume action analysis, you would think that the majority of them are profitable. But that is not so. Majority of them are not successful, and some only barely scrape by from trade to trade. As a matter of fact, according to statistics, up to 90% of traders go burst and go home. In short, as a potential stock trader or investor, the odds are against you.
More interesting than the fact that such a considerable number of traders fail is that the majority of those stock trading failures are attributed to three primary causes: lack of a trading plan, or not sticking to it when there is, fear and greed, and not learning from previous mistakes. These three are connected as trading with no plan, for instance, only creates random results, and makes it hard for you to trace your mistakes and overall performance. Therefore, with the development of a sound trading plan, trading or investing psychology, and occasional self-reflection, you can tremendously minimize your loss.
Developing a sound trading plan cannot be over emphasized. You must have well-defined entries, exits, and position size before you make any trade. How you intend to manage market risks should also be a part of your plan. There are two main rules of risk control, and you should stick to the two each time you trade. The Two Percent Rule states that you must not risk more than 2 per cent of your account equity on a single trade. The Six Percent Rule stipulates that you must not open any new trades for the rest of the month when the sum of your losses for the current month and the risks in open trades reach 6% of your account equity.
Also, your success or failure, as a stock trader, depends on your psychology. You may have an ingenious trading plan, but if you cannot take charge of your emotions every time you trade, you and your account will suffer for it. You and your account will suffer in the sense that a streak of lost trades will negatively hamper your psychology and make you lose confidence in yourself, leading to more loss. Thus, when you become aware of fear or greed on your part, stay away. Moreover, when the market is open, it requires discipline on your part to follow the plan you have created when the market was closed.
Finally, in his book, The Most Important Thing, Howard Marks emphasizes the importance of second-level thinking in investing. Because stock trading is not an exact science, you can develop your strategy and approach of looking at the market. In fact, you cannot do the same things others do and expect to outperform them. Hence, you have to be able to out think the consensus and be reflective enough to learn from previous mistakes. Trading/investing is an endlessly fascinating adventure that can be very rewarding. Enjoy it.
