Three Ways NOT to Lose Money By Evaldo Albuquerque, Editor, Exotic FX Alert and Currency Capitalist Dear Sovereign Investor, Not every investor lost money in the stock market crash of 1929. In fact, one trader made a cool $100 million trading stocks - about $1 billion today.
His name was Jesse Livermore.
Did Jesse retire on the beach and live happily ever after? Nope. He filed for bankruptcy five years later.
And a few years after that, he blew his brains out in a hotel bathroom.
Jesse’s story is a good example of how our own emotions can become our worst enemy in trading. After making his fortune, he became reckless in the markets and lost everything.
Today, the lack of emotional control remains the main reason why traders make so many costly mistakes. So let’s take a look at the three key mistakes that traders make... and how you can avoid them.
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Mistake # 1: Jumping in with Both Feet Would you perform a surgery or fly a plane full of passengers without training? Of course not - that would be insane.
But when it comes to trading the markets, that’s exactly what a lot of people do. They jump right in, without any kind of guidance or plan because they feel confident they can beat the market.
Making money trading the markets is not easy. If it was, you could just quit your day job, buy a little condo on some tropical island and never look back.
Now is it possible to reach that point? Sure. But it’s not going to happen overnight.
So before you start trading, you need to make sure you have a plan.
After learning the basics of the market, you should start out with a paper trade account to try out a specific trading strategy. Then you can move on to real money trades, risking a small percentage of your portfolio.
There’s an African proverb that says: “Only a fool tests the depth of the water with both feet.” When trading in the markets, it’s always a good idea to tiptoe before getting into the water. Mistake # 2: Eating Like a Sparrow, but
Defecating like an Elephant Back in the 1960s, a pair of Canadian psychologists made an unusual discovery.
They determined that after placing a bet at the racetrack, people feel much more confident about their chances of winning than they did prior to making the bet.
That’s just the way our brains are wired. Once we make a choice, we tend to find ways to justify our earlier decisions.
This instinctive response can be dangerous in financial markets.
If a trade starts to move against you... you may find many reasons to hold on, hoping it will turn around.
And vice versa - if you get into a trade and it soars, you may take profits too early. Or even worse, you may hold out so long that your winner turns into a loser.
End result: You either wind up eating like a sparrow, where you nervously close out small gains. Or you defecate like an elephant - holding onto losers until they swamp any gains you made.
One way to protect you capital is to always use stop losses. And always know - before you get into a trade - where you plan to take profits. Mistake #3: Focusing on Making a
Million Dollars The 1980s movie Wall Street coined the term "greed is good." But things are different in real life.
If you only focus on making money when trading the markets, it’s very likely you will lose it all. When greed takes over, traders make huge mistakes, such as betting all in one single trade or not using any stop losses.
Before placing a trade, you should always ask yourself “how much will I lose if this trade goes wrong?”
But many traders have no clue as to how much capital they’re risking on any single trade.
That’s a mistake.
All the most successful traders focus on limiting risk and protecting capital, rather than just making money. By limiting their downside, they successfully grow their account over time.
You can easily copy their strategy.
As I mentioned before, start by always using a stop-loss. That will protect you from losing too much.
But equally important: You should also limit the amount you risk on every single trade. I recommend risking no more than 5% of your account on any trade.
As you can see, letting emotions get in the way of your trading is not a good idea.
If you’re making any of the mistakes mentioned above, it’s only a matter of time before your account will blow up. Most traders learn this the hard way. But if you avoid these three key pitfalls, you will not only save money, but also become a better trader, and take one step closer to complete financial independence.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert and Currency Capitalist P.S. With global stock and commodity markets in turmoil over lingering Eurozone fears, the Sovereign Society believes our recent interview with one of the world’s top currency traders has become essential reading. This week, even gold - often a safe-haven for investors - has taken a severe battering. But our mission at the Sovereign Society is to find ways for our members to profit, even when markets are spiraling downward. For access to this essential information, click here... | |
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