Traders, You Must Know Your Limitations

Do you remember the Clint Eastwood movie where he said, "A man's got to know his limitations"? Of course, this goes for a woman as well. You've simply got to be realistic about what you are capable of. I hate to say it, but some people are just not cut out for trading. However, self evaluation can sometimes be very difficult. It kind of falls into the category of "nobody thinks they are a bad driver". Obviously, if you didn't think you were able to be successful at daytrading, then you probably wouldn't be reading this article. However, just because you think you will be successful at trading, doesn't make it so. So for those of you that are unsure if you are cut out for it or have difficulty with self evaluations, here's my sure fire way to determine if you are a good daytrader. Look at your bank account. If your account goes up, then you are doing well. If it goes down, you are not doing well. If in a couple of years you have more money than you started with (without adding more funds), then you are off to a good start. If you have less, then you are making mistakes. If in five or ten years you are consistently making money and/or have entered the big leagues of trading, then you probably are cut out for it. If in five or ten years you are broke or having to fund your trading from other profitable areas of your life, then you probably aren't cut out for it. At the same time, you are only a failure if you quit. My philosophy has always been never give up. If the person that became successful on the 20th attempt had stopped at the 15th attempt, then they would have been a failure. Daytrading can be a very hard road; you don't learn this stuff over night, It takes months, even years to become even a half way decent and savvy trader. No one walks into this business and learns it over night. It's like anything else in life - it takes time. It also takes practice and the ability to learn from your mistakes. If you find you tend to blame your mistakes on everyone else, forget it. Stop while you still have some money and get a day job. I've never met a good trader that pointed a finger at someone else. At the end of the day, nobody forces you to enter the trade. No matter what advice you follow or what service you use, the buck ultimately stops with you since it's your decision to follow through with the trade in the end. One thing you will never hear a successful trader say is "I lost money, but it wasn't my fault". Every good trader I know takes full responsibility for every trade they make and every action they take. If you cannot say to yourself, "I messed up that trade big time, and I'll never make that mistake again!" then you have selected the wrong business to be in. You simply have to be able to stand back, look over what you are doing and honestly evaluate what is working and what is not working. If something you are doing is not working, then you must make changes. Trading is a highly fluid type of business; it's always changing, and you must adapt and change with it. What you must do, ultimately, is learn what works for you - not what works for everyone else - what works for you. Part of that is knowing your limitations. Taking up a position in a stock when you are less than 100% confident is just a disaster waiting to happen. Being confident doesn't mean being right. You can't always be right. However, based on the facts you have available to you regarding the stock and/or company, you can be 100% confident that you have done your homework based on what information you have available to you. Anything less than this will tend to induce uncertainty into your trading. This will often times undermine your confidence and ultimately your ability to stand firm when others are selling. By the same token, you must also be confident enough to exit a position when you realize you have made a mistake in a trade. No one is suggesting you hold a stock that is in trouble. Rather, you base your trading on facts, not fluctuations in the markets. Once you have made your decision to buy or sell, if you are right, ultimately the markets will come to you with a profit. Others may sell because they see someone next to them sell, but that is not, and never has been, the road to success on Wall Street. Don't follow the crowd - follow your brain, follow facts. Be confident in your trading and thinking and you will generally (if you are smart and use all the facts at hand) come out on top a large percentage of the time. It is important to have a complete plan before entering any trade. This is so critical to successful trading, yet so rarely do I see people actually do it. Before you ever place a trade, you must - absolutely must - have a plan of action for how you are going to handle the trade. What price you are going to pay; what price you are going to sell at; how many shares you will buy; what price you will cut your losses at, etc. This is critical. You must have a strategy to handle not only the upside, but also the downside. Be prepared for the good and the bad of the trade. Where will you sell the stock should it move up, and what price will you exit the trade should it move south? How long will you hold the stock if it doesn't move at all? These are all questions that should be asked and answered before you purchase any stock for a trade. This goes hand in hand with being 100% confident. You must have a plan of attack. Think of each stock you buy like a battle to be fought on the battlefield. You are the 4 star General of the trade. Do you think a General would direct his troops onto the battlefield without a full plan of attack? Without thinking out every possible scenario or what could go right or wrong? This is exactly how you must approach each trade you make. Just as important, once you develop a plan, adhere to it. If the stock hits your sell price, sell and move on; if the stock hits your stop, get out. Don't change your strategies because of your emotions. Change only because of additional facts which you did not have when you formulated your plan, or if you clearly identify an error. Never change your plan to try to justify your actions or justify the movement of the stock. Remember the old saying: the market is always right. To be successful, you need to understand the only mistakes that are made in trading are your own. As soon as you identify a mistake, take action to correct it, not justify it. Good luck in the markets! No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. Questions and comments can be sent to Ray at articles@daytraders.com