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That great American philosopher Mike Tyson was once asked about whether it worried him that his opponent was training hard and seem to have developed a fight plan against him. Tyson respond with something to the effect of "Everybody has a plan until they get punched in the face". So true. Once you get knocked back on your heels, everything changes, with your plans often getting scrapped in the process. Traders and investors know the feeling all too well. Even the best made trading plans and analyses can be ignored after the market throws you a curve ball and administers the equivalent of a punch in the face.

All of this came to mind yesterday as I was watching what seemed to be a muted reaction to the Fed decision, and more importantly, a reaction that did not fit well with the plans or expectations of many of the traders I was following on Twitter. When this happens, it is easy to start improvising, but of course, this is where new traders, and even those with experience, start to get into trouble.

On such days I always find it useful to remind myself of some common mistakes to avoid, three of which are nicely presented in a new wallstcheatsheet.com article based on interviews with traders Joe Donahue and Joey Fundora (see article). While most mistakes fall into the category of common sense, it is still good to remind ourselves of them from time to time. The three mistake given by Donahue and Fundora, along with some added comments, include the following:

1) Not Selling Fast When You Are Wrong: Here it is important to remember that one of the most important metrics is knowing what you can lose on a given trade or investment. Of course, having an idea what you can make is also important, along with knowing what the risk-reward of the trade or investment is, but knowing when to cut your losses will keep you in the game. The old adage of "let your winners run, but cut your losses quickly" applies here. If you let the winners run, but have tight 8-10% stops on your losses, it is possible to be right less than half the time and still make money since you have kept yourself in the game for those times when your due diligence pays off, and the market finally realizes how smart you are.

2) Using Multiple Approaches or Strategies: This ties in somewhat with the Mike Tyson quote. While it is important to have a trading/investing plan and strategy in mind, you need to remember that every once in a while the market is going to punch you in face. During these times it is important to remember why to got into the trade and try not to stray or trade aimlessly or recklessly, simply chasing. Sometimes the best contingency plan is to simply walk way from the computer and shut your engines down for the day, giving yourself time to evaluate your strategy.

3) Trading Too Large: Trading small, or even paper trading, is always good advice for new traders. Stepping back on the amount of capital at risk is also good for experienced traders who have hit the wall and are not seeing trades and investment opportunities quite as they should. Even baseball players that consistently hit over .300 will lay down a bunt just to help them get out of a slump. Trading is no different - except you often don't get paid when in a slump, making it all the more tempting to swing for the fences. Discipline is key.


A few other common mistakes worth repeating include the following (adapted from here and here):

  • Mistake 4.) Committing too much capital per trade
  • Mistake 5.) Not effectively using different time frames
  • Mistake 6.) Not using technical analysis (using only fundamentals, especially for short-term trading)
  • Mistake 7.) Not paying attention to what the market indexes are doing
  • Mistake 8.) Not being selective enough, and taking the time to screen for the best opportunities
  • Mistake 9.) Not paying attention to volume
  • Mistake 10.) Not paying attention to sectors (and industry trends)
  • Mistake 11.) Not knowing what to expect from the trade (risk versus reward)
  • Mistake 12.) Being greedy and not leaving the party soon enough
  • Mistake 13.) Following the crowd too long, or too late in the move (chasing the market)
  • Mistake 14.) Immediately reversing the trade once it goes against you
  • Mistake 15.) Trying to pick tops and bottoms
  • Mistake 16.) Losing your cool and letting your emotions cloud your thinking
  • Mistake 17.) Waiting too long to pull the trigger after the analysis is done
  • Mistake 18.) Trading too many markets at once
  • Mistake 19.) Assuming the news you just read has not already been discounted by the market
  • Mistake 20.) Relying on tips or talking heads without doing your own analysis.

I am sure there are many more, some that you think don't apply, and probably even a few other mistakes not mentioned that I continue to make myself. Here is hoping that looking at the list causes you to remember why you have succeeded in the past, and why you continue to be a successful trader / investor - or at least reminds you to walk away or just bunt every now and then.

Source: Everybody Has a Plan Until They Get Punched: Mistakes to Avoid in Turbulent Markets