Saturday, June 23, 2012

The worst mistake traders can make

Summary of a post in The Stock Sage

The worst mistake a trader can make is trading too large.

Trading too much size as a percentage of ones account leads to many of the other pitfalls because it affects the trader’s decision making and causes them to do things that they otherwise wouldn’t do such as:
  • Overtrading resulting from stops that are too tight because the position is too large
  • Not adhering to stops and/or adding to losers because “they can’t take such a big loss”
  • Using confirmation bias and/or indicator abuse to justify remaining in a trade that they would otherwise close out
  • Taking profits simply because the trader has a big P&L not because it’s objectively the right decision
  • Subjecting oneself to market noise (small price deviations) instead of being able to withstand normal market fluctuations because the position is too large
My Notes: I agree with this analysis. As an example, I am long in July Nifty call Options. I am comfortable with the quantity that I am holding. This has enabled me to ignore the intra day volatility that we have seen recently. If my volumes were larger, I would be looking for stops, exiting at the wrong points, then maybe even taking an opposite position just to cover up.

What do readers say?

14 comments:

Technotrader said...

Agreed sir, I remember my mistake four to five months back of trading in more quantity and I am still not came out of the losses I suffered due to it.

Jitender said...

Yes I agree with analysis too. I think mistake many people do is that they buy at any arbitrary point and keep an arbitrary percentage stop-loss from entry point without considering how far support is from entry point. Then with a bit of spike of volatility against them they exit at point where professional trader enters because of better risk/reward opportunity due to nearness of actual support. This is in my view reason why 'novice trader' stop-loss get hit and market resumes back in direction of original trades. Novice bears are always willing to short market if its not moving up with high speed or consolidating a bit. For them if its not going anywhere it will go down. Resulting in shorts squeeze.

Jitender said...

Further in this type of volatility I better like to exit target by target, instead of holding overnight.

RS said...

I agree with you. I took large position in crude mcx 2 days back with tight stop loss and got burnt. I realized my behaviour and than traded within limits yesterday and made money. The post is very much real life behaviour

Nikhil Dalvi said...

I think agree beyond point. Psychology is the most important for trading. But why do people trade bigger size - if we have to give one answer it is for bigger returns on the trade for which they are super confident. This has to be and is most of the times the premise. There is lot of greed. At times the size of fund is less and they want to get maximum return. An experienced trader knows all this or has gone through all this and has learnt mostly the hard way no to avoid mistakes. Get what the market gives and be happy with it, within his strict money management rules.

Nikhil Dalvi said...

I think agree beyond point. Psychology is the most important for trading. But why do people trade bigger size - if we have to give one answer it is for bigger returns on the trade for which they are super confident. This has to be and is most of the times the premise. There is lot of greed. At times the size of fund is less and they want to get maximum return. An experienced trader knows all this or has gone through all this and has learnt mostly the hard way no to avoid mistakes. Get what the market gives and be happy with it, within his strict money management rules.

Jitender Yadav said...

Respected Sir

This is a very very useful post. I had faced this problem for so long earlier. I used to trade with a size that was much larger than my comfort level so any movement toward the stop loss point would make me nervous and I would exit even before the stop point is hit or I would book profits early only to regret later. One of the biggest reason for indiscipline in trading is trading a size which is beyond one's risk taking ability. One should not make a bet, he/she can't afford to lose.
Sir you are doing a wonderful job for us followers by bringing these useful posts. Thank you so much sir.

Your Fan
Jitender Yadav

avv said...

Dear Sir

Thanks for another relevant and important post. As usual you have linked the idea nicely with current market. In your opinion what should be trading capital per nifty future lot for a serious trader. Does the capital requirements are different per lot of nifty option?

Thanks in advance

Atul

Mind Without Fear said...

In those days when I thought I knew it, I would take 5-6 mininifty. Well Now I know better. Always trade with 1 mininifty. AND ONE TRADE PER DAY, if at all. Keeps my loses in control and prevents huge losses in a given day. As a learner, try to chant my mantra - Focus on the loss. Minimize it.

discipline focus said...

Sudarshan Sir,
You have highlighted the biggest area of concern in trading, to my experience I have found 60-70% of trading losess occuring due to this significant reason. Alas few articles are wrote in trading journals/memoirs/books to overcome this. But to be honest, the above article only discusess the cons/affects of the problem, not the solutions or shall I say "precautions". I came up with a list as to why even the most sane, disciplined, cool temprament players fall in the trap-
1) Sure-shot trade- Their comes a time in trading when you are so sure of the upcoming move, it make itself "obvious" through indicators/analysis. You go overboard and commit too much, holding your breath and either the market noise stops you out or suddenly market changing sides.

2)Straight losess- you have had 3-4 losess in a row with your trading size and you want to double/triple/quadruple the size in next trade to overcome losess.

3)whipsaw effect - you have had whipsaw while increasing your size and you end up chasing momentum with huge sizes and market being in a narrow range, stop you out with noise.


A write-up for the "precautions" would be hugely appreciated

regards
your silent diligent reader
discipline focus

Waseem said...

Absolutely True,its always better to trade small and win consistently rather than taking big risk and losing everything.

LJ said...

Exactly Sir! most of the intermediate traders know it but only professionals able to follow .

If i say, i went long on reliance future on 19/06, and become freezed when I saw the rates on 21st afternoon ( i was so confident in the move that i didn't checked the price in morning , i was expecting a target of 760 levels ) now looking for all sort of excuses to avoid the selling and booking the loss !!!

Rakesh Shethia said...

In the previous blog, we talked about the cycles - expansion and contraction. To extend the topic, how can we identify if the contraction is a consolidation or a distribution? what are the features and distinguishing points classifying them so.

Unknown said...

I do agree, at a particular situation some time it becomes very difficult to hold the current position & if the volume of trade is large then we become inpatients.
I have done this mistake many times & end up incurring losses in both directions.

Crasto Walter J.