Everything is Clear in Hindsight
I've been asked by a few of our friends to write-up about the perils and pitfalls of my early days in stock trading. Funnily enough, there are so many of them that I could probably write an entire book on the subject.
I've been so busy pruning the weeds out of my "stock trading garden" that I seldom reflect on what has actually changed. Perhaps this is because I want to "focus forward" and not revisit the trauma that were my early trading days. Truth be told, I have had some stomach churning days trading stocks and still do!
Honestly, I really can't see how someone wouldn't, stock trading is literally full of traps. From shady brokers to outright market manipulation, the market is dangerous for your head and likewise your wallet.
The Major Mistakes to be Avoided
Some of the major mistakes I will drill deeper on are as follows:
- Not knowing how much I was paying my broker (lucky guy).
- Reading literally everything about trading and trying it all at once
- Trading on tips and rumors
- Buying cheap shitty stocks in the hope of major gains
- Moving stop losses or not having one
The first mistake alone would have saved me around €10k but more importantly, the opportunity cost of the rest would have made me a millionaire on several occasions. We've all been there, FOMO trading, over-trading and closing our brokerage account when things go bad.
Hope is like a drug. Relying on it is a sure fire way to lose at what is an exceptionally challenging game.
1. Brokers Make You Broke
During one of my coaching sessions I asked a prospective trainee for a list of his most recent 50 trades. We manually plugged these in to the trading journal and to his disgust, he was down over $2k on the year (but didn't know why).
He was actually the influence on one of my write ups Choosing the Right Online Broker.
Upon inspection of his trades, we found that he was actually not as bad as he thought. Had he cut a few of his major losses, from a raw trading data perspective, he would have been up high double digits on the year! Even though this was a small account of around €10k, his win/loss ratio was spot on and his stock selection was actually quite impressive.
To my absolute horror, he shared with me the fee structure his bank was charging for buying and selling shares. He was paying on average €100 for a round trip of buying and selling shares! I was literally in disbelief that in 2019 someone could legally pillage someones money in this regard. In stock trading, if you don't ask, nobody will tell. Fee structures can be murky and not reading them can be very expensive.
Think about it this way. If he was trading stocks with a €10k account and allocating a max 25% of his equity per trade, he would be down almost 3% on the trade BEFORE it happens!! Being an active trader, he made around 200+ trades per year, and so to break even he would need to be up 20% and then some to be in profit.
Before you trade, check your fees and do the math, of course make sure to check out their insurance and read tons of reviews on them as well A good resource, other than my blog above is broker chooser.
Don't do it in a Vacuum
Before diving in, make sure to also consider platform fees etc. and other considerations. Treat trading as a business. You want premium service and small fees. Both are more possible than ever.
2. Reading Everything and Knowing Nothing
When I began reading up on trading I couldn't believe how simple it sounded to make money in the market. Each book I read espoused a new way of trading better than the last and before I knew it I was drowned in a see of information.
My only option at this point was to know more. I needed to know macro-economics, politics, philosophy, game theory - trust me the list was exhaustive. Ironically I became the one exhausted.
I found it hard to believe I could create wealth from what now are a handful of quality books on the subject. Every time I met with a trade being stopped out, I tried my best to use options or other strategies to "hedge" my postilions - which led to other fears about the options expiring worthless and so on.
I realise now that looking back, the behaviour and urgency on trying to know it all in trading gives you very little room to know yourself. Specifically in what works and does not when dealing with loss and the true learning from the market - experience.
I call this "Holy Grail Syndrome" as people try harder and harder to force their values and ambition onto the stock market. In a highly paradoxical and almost comedic sense, the market will punish you for 'trying hard'. Good stock trading is systematic and requires little emotional pain if built on sound premises.
I found the best way to find valuable resources was to see how they resonated with me and my personality. So many stock trading strategies actually work but if we don't trade them properly or twist the rules to suit our own narrative then the chance of success diminishes exponentially.
My genuine advice to anyone struggling with this is to pick a lane. I absolutely love raw out and out stock trading. I tried day trading - hated it (from a lifestyle perspective), options - too math intensive and boring. What works for me is simple supply and demand, finding a trend and managing risk. Simple, repeatable and easy to measure.
Yes I still get emotional, yes I still buy put options on the SPY like an idiot and yes, it almost always results in losses that never needed to happen.
3. Trading on Tips
Trading on tips is a tricky subject as at times, my friends or people I know make money on some random pump and dump stock which they brag about when I say I trade. We've all been there trying to talk trading with someone and hear this or that story...
The thing about a tip, especially when someone else is elated about it, is that the stock is usually at it's peak with the owner high on a wave of paper profits. Somehow, we are not okay with people making money other than us, particularly if we claim to be stock traders. Ego in action.
The Stocks are typically:
- Low quality with low liquidity
- Already had their run without you aboard
- Broken tickers with no hope of return
How many of your friends with these prime tips are millionaire stock traders?
The only tips I trade these days are the tips from my own stock trading strategy which come from a rigorous screening process. Price action, volume and velocity are all that I need to make an assessment of a good or a bad purchase (for the most part).
Taking full accountability for your trading is the true mark of distinction when trading stocks. Your screening process and objective criteria ARE the tips. If you can't trust your own judgement, why in the name of shit will you trust someone else?
Form your own ideas and trade for real. If not, it's totally okay to simply index invest or do something else. If you treat trading like gambling then you can expect the same results as a gambler. Uncertain, unpredictable and making sure the house always wins.
4. Buying Cheap Stocks
This one still gets me a few times a year. I simply cannot help but try and buy a few beat up tickers in the hopes of it making a return to former glory. Like a bad relationship, I still find myself going back to the self-torture of repeating this mistake. Far less however and hopefully never again after writing it here.
Blogging by the way is a great way of holding yourself accountable for your stock trading.
Sure, sometimes this can work out, in fact, some people have an entire strategy around timing and buying broken down stocks with very specific entry criteria. For the most part however, think about it this way:
- Why have large institutions sold this stock in the first place?
- How many buyers are trapped in the decline and would love to get out at a higher price (huge supply)?
- With much better stocks available why would others want to buy this one?
It just makes no sense at all. Yes there are exceptions but for the most part, if you want to buy GE, go for it, I for one would prefer to fly economy on Space X vs sink in 1st class on the Titanic.
Just as in life, with stocks we typically pay for quality. The reason the stock is cheap is due to an obvious issue - nobody is buying it. Maybe this is a cyclical issue or some macro phenomenon - either way, I would prefer others to lay the foundation and buy up the new support zones than be used as chum for the institutions.
If a stock hasn't proven itself with some good price action, volume and power - with some cheeky exceptions (yes I am human), I will stay away.
5. Moving stop losses or not having one
This is honestly something I can happily say I do properly in my trading with great consistency. In the past however I got burned countless times by moving stops believing "this time it's different". It's a real psychological paradox to cut losses as humans associate this with "failure".
Being raised a certain way I was always taught that losing or stopping out, quitting, giving up (you can imagine the list) is bad. Not so.
If your not already following Mark on Twitter I highly suggest doing it because of gems like these:
This type of thinking is toxic and typically based on FOMO and many other assumptions tied to our ego.
Large losses have a double sided impact. The first and most obvious being your account, the second being your investing psychology and motivation to keep playing. I wrote an in-depth article on anxiety and trading stop losses are essentially my stock trading Xanax now - I can't trade without them.
The same goes for taking profits too early.
I like to keep my entries and exits simple and rule based.
I decided to break this blog into a 3 part series making it easier to digest. Funnily enough whilst writing this article I began remembering all of the issues I went through on my road to profitability. It speaks to the fact that trading is not easy and needs to be run like a business.
As in any business, there are costs, risks and styles which we need to develop, own and execute. Somehow, people think stock trading is magically different.
The reality of trading stocks is it is truly experiential. It takes time, market exposure and lots and I mean LOTS of failure to get into a good place and trade without stress. The above pointers are just a guide and I will expand on them in time.
Much of my blog is around trading errors, psychological and otherwise. Without doing the small things correctly, the probability of doing the big things correctly is reduced. As we are in the game of probability, it makes sense to stack them in our favor by looking at the system as a whole. Going into the garden and ripping out the weeds one by one.
Trading stocks is not one event but a series of actions, behaviors and beliefs converging on our perception of reality. Reducing complexity and cutting out the noise is literally how we make money - if there is another way, please comment below and of course, we love subscribers and want to share the truth about trading!