What are the common errors, the improprieties, the lack of attention to proper mores, the p's and q of trading that cause so much havoc and could be rectified with a proper formal approach? Here are a few that cost one fortunes over time.

1. Placing a limit order in and then leaving the screen and not canceling the limit when you wouldn't want it to be filled later or some news might come out and get you elected when the real prices is a fortune worse for you

2. Not getting up or being in front of screen at the time when you're supposed to trade.

3. Taking a phone call from an agitating personage, be it romantic or the service or whatever that gets you so discombobulated that you go on tilt.

4. Talking to people during the trading day when you need to watch the ticks to put your order in.

5. Not having in front of you what the market did on the corresponding day of the week or month or hour so that you're trading for a repeat of some hopeful exuberant event which never happens twice when you want it to happen.

6. Any thoughts or actual romance during the trading day. It will make you too enervated or too ready to pull the trigger depending on what the outcome was.

7. Leaving for lunch during the day or having a heavy lunch.

8. Kibbitsing from people in the office who have noticed something that should be brought to your attention.

9. Any procedures that violate the rules of the British Navy where only a 6 inch plank separated you from disaster like in our field.

10. Trying to get even when you have a loss by increasing your size and risk.

11. Not having adequate capital to meet any margin calls that mite occur during the day, thereby allowing your broker to close out your position at a stop while he takes the opposite side. What others do you come up with?

Jeff Watson writes: 

I don't know if it is an error or a character flaw, but freezing will create mayhem with your bottom line.

Alston Mabry comments:

"Do Individual Investors Learn from Their Mistakes?"

Steffen Meyer, Goethe University Frankfurt– Department of Finance Maximilian Koestner, Goethe University Frankfurt - Department of Finance Andreas Hackethal, Goethe University Frankfurt - Department of Finance

August 2, 2012


Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates to better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover, suggesting that investors learn from overconfidence. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is indeed related to learning from overconfidence.

Kim Zussman writes: 

Trading a market, vehicle, or timescale that is a poor fit for your personality, temperament, and utility, exacerbated by self-deceptive difficulties in determining this.

George Coyle writes: 

Speculation by definition requires some amount of loss otherwise the game is fixed. However, I believe loss can be broken down into avoidable loss and unavoidable loss. Unavoidable loss is, well, unavoidable. But in my personal experience (and based on pretty much all speculative loss I have seen or read about) all avoidable speculative loss is traced back to some core elements/violations: not being disciplined (many interpretations), getting emotional and all of the associated errors and mistakes that brings, sizing positions too big so that regardless of odds you eventually have to reach ruin, not being consistent in your approach (the switches), not managing your risk adequately either via position sizing or stop losses, finally you have to be patient for the right pitch whatever that may be for you. 

Jason Ruspini writes: 

A similar distraction comes from making public market calls.

Jim Sogi writes: 

The Sumo wrestlers' trainers in Japan are conscientious about avoiding mental strife in their fighters since it affects their performance. Sometimes when other life issues intrude, like getting up on the wrong side of the bed, it is better to refrain from entering a large position. You're off balance. How many times have I thought to myself, "I wished I had just stayed in bed this morning"?

William Weaver writes:

Mistakes I'm working on:

-execution error
-having too much size too early — the first entry is usually the worst
-not being able to add size when appropriate — need to add to winners; understanding when to retrade and why — why did the trade fail, was it me or the trade?
-not taking every trade
-need to adjust orders when stale
-not touching orders when not stale
-not getting excited about trades
-not holding until appropriate exits, especially winners — disposition
-not accepting the risk. Must accept the risk.

When we fear, we fail. But we cannot be courageous without risking overconfidence because it leads to recklessness (at least I cannot). So how to not fear and not be courageous at the same time? One of the best traders I know is indifferent to any trade, yet he is excited by his job. He also has (and shoots for) only 40% winners but simultaneously is profitable on a daily basis (and expects to be). These were contraditions to me 8 months ago, now they are just fuzzy in my mind and I understand them but cannot explain them.





Speak your mind

6 Comments so far

  1. Craig Bowles on September 28, 2012 2:06 pm

    Trying to get the top or bottom tick probably isn’t something most people need to do.

    An investor buying a bottom late in recession is expecting normally 35% over 14 months. There’s normally a pullback 4-5 months in that can be a full retracement like in late 2002 to early 2003. The first third of the duration can be tough even if you’re right. If you’re wrong like in the April/May 2001 rally, the surprise extended downside doesn’t get you if you wait. Stocks normally decline around 10 months in a recession unless it’s global which is longer, so the first 3 or so months of the move can be observed. You might miss out on the whole thing but you aren’t constantly trying to pick tops.

    Look at this bull market. It started with an downside outlier but was generally trading around 800. The correction a few months later was 940-880. The turn was exactly similar in duration to the 1973-75 global bear market bottom and extremely oversold, but it’s probably prudent to first watch and see if the market behaves as you expect. Intraday trading will beat you to death if trying for those top and bottom ticks, and being prudent isn’t very expensive relative to the trade.

  2. ld on September 28, 2012 2:27 pm

    A few additions:

    - Second-guessing one’s own original objectives while opening a commitment and waiting too long (on buying or selling) or not waiting long enough to pull the trigger to close the commitment.

    - The more mundane one is the typical system default of “buy” when one wants to sell causing a mistake in the ticket in the wrong direction. Ouch.

    - Watching CNBC during the trading day.

    - Buying or selling based on a tip from someone else (no matter who).

  3. Mike on September 29, 2012 1:19 am

    Common Tricks That Make a small Fortune
    *Its so much easier just going the opposite of where the market has been going, stop thinking I can think of something more elaborate.
    *But when your in a position thats working, just break your mouse and go to the store and buy another one, when you come back you’ll be more pleased with yourself than trying to get both up and down trends.
    *If you get out too soon, just jump back in.
    *Stay with the trend but watch out for the reset, try not to be scared out of your position.
    *If a new trade moves just a little bit against you than projected just get out. Especially if the move is essentially nothing.
    *Sitting is the best exercise a trader can do. Sit for days if you can.
    *Adding more, when things are working has always helped, try not to add near a top though.
    *No sight of market news is the best news.
    *Better to trade up or down for the day than a mix of both.

  4. Matthew on September 29, 2012 1:27 pm

    I think the main error traders make is to put too much focus on technical analysis without taking the fundamentals into account.

  5. JustPassingThrough on October 1, 2012 1:59 am

    Taking a position to prove a point rather than make money. The addiction of “all-knowing” has bled dry as many fools as have alcohol, sex, and political ambition.

  6. Andre wallin on October 1, 2012 9:26 am

    Do you experienced speculators find any use for TT with its high monthly cost especially if you’re not attempting to day trade for all the good reasons you have mentioned?


Resources & Links