Have you ever had a series of successful trades, only to do something dumb and give all those profits away? If you haven’t, congrats…it’s a crappy feeling to see one mistake destroy several right decisions.
Of course, a lot of trades are going to end up being losers for us. Just make sure to execute your strategy and apply proper risk management to your trades. It’s the times when we don’t do that, which gets us in trouble.
Lack of discipline
Like it or not, it stems from the lack of discipline. Having discipline allows us to stick to our trading plan, not chase trades and not gamble our money away. Trading discipline can be gained through repetition.
For example, you follow a specific process in terms of how you manage and select trades. You wait for the setup and criteria that have worked and continue to. That means if you’ve found success with a mean reversion strategy, then that’s where your risk capital should be deployed. If you want to get involved with event driven strategies, but don’t have a track record, it makes sense to trade these much smaller so they don’t kill your profits from winning strategies.
Ideally, you want to figure what type of trades work best and which ones are suitable for your trading style. Once you have a clue on what your bread and butter trades are, then that’s what you focus on. Some traders, are clueless in terms of what their strengths and weaknesses, which makes them vulnerable to making poor choices in terms of trade selection and money management.
If you’re in that boat, start recording your trades in a spreadsheet and journal. Start analyzing your trades, walk through the life cycle of the trade before you buy stocks online.
Some useful questions that you could try answering include:
Why did I get into this trade and what was my edge?
Did I have a specific exit strategy and plan?
Did I execute my plan?
Did I size my trade correctly, given the volatility?
Should I have been more or less aggressive?
How was my execution?
Find your strengths and weaknesses
Scrutinize your trades to the bone. That is how you’ll find out strengths and weaknesses. Four-time NBA champion, Shaquille O’Neal, was one of the most dominant big men in league history who scored the majority of his 28,000+ points in the paint. He knew within five feet from the basket he was nearly unstoppable. Going back to trading hot penny stocks, having this type of awareness should really build discipline.
Outside of identifying your strengths and weaknesses, you must have a rock solid risk management plan to match. This also can be greatly improved by analyzing your trades. For example, knowing on average how much you make on winning and losing trades. So, let’s say your average winning trade makes $200 and have a win/loss ratio of 50%. In this case, it doesn’t make sense to drawdown past that limit. It’s business 101, make more than you lose. If you’re spending (losing) more than what you’re bringing then you won’t be in business too long.
The key to trading discipline is really understanding the ins and outs of your trading operation. Do that and you’ll be on the road to greater success with the top penny stocks.