Sunday, January 24, 2010

Lessons from my mistakes

“All men make mistakes, but only wise men learn from their mistakes.” 

- Winston Churchill

The regular readers of this blog know that I had a brutal week last week and by now, also know of the exact trades I made. (For the uninitiated, please see here and here). But you also know of my determination to learn from my mistakes, and make last week the most "profitable" week. I have thought long and hard of my mistakes from last week, the kind of mistakes I thought I had stopped making, and reached some conclusions about where I went wrong and how not to repeat these mistakes in the future.


Here it goes.....

1) When I started trading actively about a year and a half back, my biggest problem was learning how to take losses. After I learnt how to take losses, the problem evolved  into how to deal with these losses emotionally. I am glad to say that now I am quite comfortable in taking a loss. But in going through my recent trades, and you can go through them too here, I have realized there is a disclaimer attached to the last statement.....I am "pleased" in taking the first loss. I am comfortable in taking a second consecutive loss. But after three or more consecutive losses, its starts affecting me and thus my trading. I start getting the feeling of trying and getting my money back from the markets which as we all know, is a very very wrong and quite possibly, disastrous emotion. Markets owe me absolutely nothing. So, this brings us to my first "rule"


Start trading real small after second consecutive loss.

2) The second rule follows directly from the first rule but involves two losses on the same day. You gotta know when to hold them and you gotta know when to fold them. Most importantly, you gotta know when to walk away.

Stop trading for the day if I take two losses on the same day.

3) Both the above rules apply to losses. But I have noticed that one has to be careful while doing well too. My account was up almost 10% for the month and ~ 175% in the past one year before last week. Trading seemed easy, in fact a little too easy - the easiest it has ever seemed. Looking back, this should have been an alarm bell ringing loud and clear right there. The markets have a way of bitch slapping you when you start showing even the slightest signs of overconfidence. So, that brings us to rule number 3.


Be extra cautious when in the middle of a hot streak and at the slightest sign of overconfidence, start trading small. 

4) I shouldn't have to explain this one to you readers if you have read the posts of last week.


Always have a stop loss in place for your positions if you cant follow your screens even for a minute. 


That's what I have till now. I will be labeling this post "lessons" for easy access in the future. I will be adding to this post in the future as I am sure I will be making more mistakes, but hopefully not the same ones. 


Let me know if you readers think I have missed out on something and should add some more "rules". Growing and improving together as traders is the whole purpose of this blog and there is no better way to learn than from each other's mistakes.

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