Trading Strategies – “Small” Mistakes
Having Trading Strategies is important. In the highly leveraged liquid financial markets no matter how successful you are, a single mistake can lead to significant losses. David Einhorn, one of the best hedge fund managers in the world recently made an investment in SunEdison. Even after making many appearances supporting the company, it recently filed for bankruptcy. Bill Ackman has been in the hedge fund business for more than 20 years. His fund has achieved above average returns. However, a single investment in Valeant Pharmaceuticals threatens the existence of his hedge fund. Every year, many hedge funds are shut down. This happens not because of the incompetence of hedge fund manager but because of small mistakes. For day traders, a single mistake can lead to significant losses. A few years ago, on a Friday, I was $200 short of my then weekly target. Then, I decided to make the $200. In a bid to make the $200, I lost $1600 (not small money in any sense).
#1 – Average Down
Suppose you placed a buy position on Brent at $45 and then after a few hours, the price has gone south to $42. If you are fully convinced of your long position, you can decide to buy more oil. This is known as averaging down. It is a situation where you continue to buy an ‘asset’ that is going down with the hope that it will reverse. This is usually a major mistake that can be avoided by sticking to your thesis and stopping the trade when the maximum acceptable loss is made. When you keep holding a losing position, you waste time and money because it will be difficult for you to open other trades.
#2 – Trading Before and After Data Release
There are two facts you need to know. One, after the release of major news, there will definitely be major movements in the respective currencies and commodities. For instance, if the non-farm payrolls increase in the US, chances are that the dollar will gain. The second fact is that there is no one who can forecast the numbers accurately. Therefore, one of the biggest mistake you can ever do is to trade right before and after the news. If you believe in your betting instincts, then you should always use very small lot sizes.
#3 – Over-Leveraging
Leveraging is an important method you can use to increase your trading profits. The higher leverage you have, the higher profits you are able to make. However, the more the leverage, the higher the chances of making a bigger loss. As a small trader, you should avoid using the large leverages used by major financial players. At first, a single trade can make you thousands of dollars. However, several trades later, your account might be close to zero.
#4 – Expert Opinion
I love CNBC and Bloomberg TV. I like reading financial news and analysis. I would advise all traders to do the same. However, I don’t advise any person to follow their sentiments blindly. Most of the analysts you see in Bloomberg are not that smart. Others have clients who pay them to say what they are saying. Therefore, their projections are not always the best. When I was a new trader, I watched an expert share his sentiments about crude oil. I was excited and went straight to my terminal and placed a trade based on what the guy said. I lost thousands of dollars in that trade.
#5 – Opening a Trade Without any Analysis
Many new traders take trading as gambling. I remember years back when I would go to my terminal, check the chart and without doing any analysis, place a trade. I made some good money but ultimately lost it all. The fact of the matter is that you can’t open a trade without doing any analysis and expect to make money constantly. It has never happened to anyone and I doubt it will happen in future. Becoming a successful trader takes time and analysis is part of it. At the beginning, this will be tough. However, once you have mastered your art, you will make money on a constant rate.