Alan Farley is a colleague at Real Money. He posted a terrific list of mental errors that traders sometimes make.
Its worth perusing:
Fighting Mr. Market. There’s nothing worse than trading a trend in a choppy market or sideways choppiness in a trending market. Make sure you know which one you’re jumping into before hitting the enter button.
Loving the bad. It’s hard to admit it when we’re wrong. Rather than cutting losses, we try desperately to transform our worst trades from lemons into lemonade. Sooner or later we find out how easy it is to turn a small loss into an absolute disaster.
Hating the good. Sometimes we know it’s a great trade, but only at the subconscious level. For some reason, we can’t handle our good fortune and jump out with a small profit. Minutes later it takes off like a rocket ship without us on board.
Arriving before the show. Seeing a trade is not the same thing as actually trading it. Bad timing forces us into many positions that aren’t ready to move. Then we get bored and give up just before they do exactly what we expected them to in the first place.
Arriving after the show. Read this one closely before it shows you how to become a bagholder. Sit on your hands and watch a great trade roll by because you want to see what everyone else does before you act. Then jump in just as all of those folks are ready to get out.
Bull fever. You’re sure the market will go up after a rally day, so you jump in with guns blazing the next morning. You’ve forgotten that markets need to shake out weak hands after a big rally before starting the next move. Guess what? You’re one of those weak hands.
Number cramp. You see numbers that don’t exist on your trading screen. Worse yet, your fevered brain thinks they’re great trades and you start pounding the keyboard to get in. It can take a lot of time to climb out of this mental mineshaft.
Ignoring gravity. We worried too much about gravity in the 1990s. Now we need to pay much closer attention to it. Stocks will go down when they can’t find many buyers, regardless of how few sellers are hanging around at the time.
Blind to the big picture.You can get into big trouble by forgetting to step back and check out the landscape. Many stocks have to grind through debris left behind by old selloffs. Every one of those red bars hides losers who want to get out at any cost.
Hooked on polarity. The diabolical market will manipulate your heartstrings at every turn if you let it. Invariably you’ll be afraid when it’s selling off and downright giddy when it’s going up. This means the trade that follows your emotions is likely to be a big mistake.
10 Crippling Mistakes Traders Make
RealMoney.com, 12/16/2004 12:00 PM