This column was originally published on RealMoney on Dec. 13, 2007 at 12:16 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please
- Honor your stops.
Stops force you to think about the price where you screwed up and need to get out of the market. In truth, every position will go where it wants to go, despite your best hopes and wishes. And even perfect trade setups will fail regularly for no good reason. The bottom line: Traders aren't investors, so stop acting like one.
- Have a trading plan and follow it. What exactly are you trying to accomplish with the stock you sold
short today? You're in extreme danger if you don't know the answer before you take the risk. So outline your strategy beforehand and then stick with it.
- Trade small, smaller and smallest. Leave big lots to the market professionals. Big risk blinds us to the big picture, because it becomes more important than the great pattern or setup we're using to make money. Taking smaller positions gives you greater control over the time element. The failure to control the time element is the single biggest reason why traders lose money.
- Match your trading to your lifestyle. Do you
daytrade your investments, or invest in your daytrades? In either case, it's a surefire way to lose money. Do you look at 100 charts each night when you only have time for five or 10? Honestly, your performance will blossom if you can master a small list of good opportunities and stop worrying about a big basket of stocks that you don't have time to follow every day.
- Take a giant step back from the intraday markets. The flood of micro-data will fry your brain and shut down your intuition. You'll also forget how to make money. Dump Level II and most of the market "tells" you're staring at each day. Then refocus your attention on the bigger numbers and longer-term swings.
- Learn to hit singles before swinging for the fences. Forget your unrealistic profit goals and just concentrate on taking a few bucks out of the market each day. Want to know a secret? This one piece of advice builds discipline and profits faster than attending a dozen trading
- Practice your fire drill. Then practice it again until you can do it in your sleep. We all face the continuous threat of big losses. You'll need to act quickly and without hesitation when the cryptkeeper puts his icy hand onto your wallet. Prepare mentally by visualizing an emergency exit for each trade. Then head for it at the first sign of trouble.
- Turn off the financial news and get away from the chat rooms. Guess what. Your opinion is the only one that counts when you put your own capital at risk. The parade of talking heads and market gurus will make you question your strategy and discipline at exactly the wrong time.
- Read a good book or two. Start with
The Disciplined Traderby Mark Douglas, and study it in detail. He'll explain why you never wanted to make money in the markets in the first place. Then you can finally start to turn things around.
- Fix the rest of your life. We smoke, drink and eat too much, but will want to trade like Warren Buffet when we jump in the market. Sadly, if you have no discipline in the rest of your life, you won't find it in the trading game. So work on your bad habits and get a good night's sleep. You'll be amazed how much it helps your bottom line.