Friday, July 16, 2010

The Daily Note - Trading Capital Suicide

Nothing kills a traders dream faster than the inability to trade; yet many go head first into trading without a second thought about it, until forced to stop.

The number 1 killer of trading capital is holding losers. In other words, not setting stop or not allowing them to work.  Many traders just eyeball a stop, or use mental stops then they change those as the price moves against them.  As the pain is given in small doses, they get used to the pain,  until  panic sets in and they cut the large loss loose as a bad appendage (usually at the bottom).

The number 2 killer working in tandem with killer #1 is letting winners turn into losers, because target is set too high. It is important to know a stock and it's potential daily move.  When sight is set too high, and such is not met, many traders think waiting for it will bring them more riches, therefore allowing a winner to fluctuate into a loser. Once a winner turns into a loser, the potential is even greater that the trader will not stick to a stop therefore creating a #1 killer of trading capital.

The number 3 killer is insisting in ones own mind that the trade is good;insisting on being right, rather than, giving in and recognizing, quickly, that they are on the wrong side of the trade. In other words it's like waiting for your ship to come in; and waiting and waiting and: another great potential of this too, ending as killer #1.

The number 4 killer is trading too much, too fast, and /or too high maximizing capital limits and not allowing for cushion so capital remains in control of the trader and not in the brokers hands. Overextending capital and margins can lead to a painful realization that the trader is not longer in control of the trade as the margin comes due. This killer will stop your trading because it has potential of violation of rules, which could take you out of the day trader game.

Are there more?  Yes. Are there worse? Well, I suppose if you put all your trading capital on one trade, it could be. But I just presume that I don't have to point that out as a bad idea.

As you reduce  your trading capital, so also you reduce your ability to day-trade.  Keep it in mind next time you are tempted to yank the stop loss because your trade has gone wrong. Again. All traders need to first and foremost learn capital preservation and trading management before putting a greenback dollar on a trade.


Happy Trading, Living and Dancing

The Daily Pick - AAPL

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