Making money is easy in bull markets
But losing money is easier in bear markets
🧵A thread on common mistakes new traders make in weak markets🧵
But losing money is easier in bear markets
🧵A thread on common mistakes new traders make in weak markets🧵
Mistake 1
Giving importance to opinions
Social media is filled with opinions. Right now, many posts compare the current market with previous weak market conditions (2015, 2018, 2022).
But here's the thing—for every comparison you show me of how the current price action will lead to a further decline (based on some price action from years ago), I can show you two comparisons of why it won't.
The truth is that nobody knows for sure.
Remember that fear is most rampant at market bottoms. A recent example is from March 2020, when a lockdown was imposed to stop the spread of COVID-19. This triggered panic selling and NIFTY fell 13% in a single day.
Guess what? That day also marked the bottom of a 40% correction.
Funnily enough, that day also saw the most comparisons and arguments for how this is just the beginning of a bigger stock market crash, and perhaps even the end of the world!
Giving importance to opinions
Social media is filled with opinions. Right now, many posts compare the current market with previous weak market conditions (2015, 2018, 2022).
But here's the thing—for every comparison you show me of how the current price action will lead to a further decline (based on some price action from years ago), I can show you two comparisons of why it won't.
The truth is that nobody knows for sure.
Remember that fear is most rampant at market bottoms. A recent example is from March 2020, when a lockdown was imposed to stop the spread of COVID-19. This triggered panic selling and NIFTY fell 13% in a single day.
Guess what? That day also marked the bottom of a 40% correction.
Funnily enough, that day also saw the most comparisons and arguments for how this is just the beginning of a bigger stock market crash, and perhaps even the end of the world!
Solution to Mistake 1
Define your parameters
Don't rely on opinions. If you do, you will most likely end up missing a bull rally when it comes (Like March 2020)
Instead, define the parameters that will guide you for when to start taking new positions. Throw news and opinions of other people in the trash - trust yourself and your system. Most importantly, truth what the market is telling you.
How to make a defined system to guide you?
Here's what I use - x.com/tradelyfblog/s…
Opinions don't make you money, market moves do.
So let the market moves guide you.
Define your parameters
Don't rely on opinions. If you do, you will most likely end up missing a bull rally when it comes (Like March 2020)
Instead, define the parameters that will guide you for when to start taking new positions. Throw news and opinions of other people in the trash - trust yourself and your system. Most importantly, truth what the market is telling you.
How to make a defined system to guide you?
Here's what I use - x.com/tradelyfblog/s…
Opinions don't make you money, market moves do.
So let the market moves guide you.
Mistake 2
Curve fitting and Strategy hopping
New traders often don't realise that no trading strategy works in all markets.
As a result, they try to make changes to their trading tactics to suit the current market or simply start looking for a completely different trading strategy.
While this might work in a backtest, this new strategy will again stop working when the market changes its character next time and you will again start looking for a new method.
Curve fitting and Strategy hopping
New traders often don't realise that no trading strategy works in all markets.
As a result, they try to make changes to their trading tactics to suit the current market or simply start looking for a completely different trading strategy.
While this might work in a backtest, this new strategy will again stop working when the market changes its character next time and you will again start looking for a new method.
Solution to Mistake 2
Backtest your strategy on all market conditions - bull, bear, sideways and everything in between.
This will give you a realistic picture of when your methods yield positive results.
I know my method works only in bull moves lasting at least 7 days. As a result, I don't put on new trades when the market is falling like it is right now—I just sit on the sidelines waiting for that eventual bounce.
Going against the trend is lethal for my system.
Backtest your strategy on all market conditions - bull, bear, sideways and everything in between.
This will give you a realistic picture of when your methods yield positive results.
I know my method works only in bull moves lasting at least 7 days. As a result, I don't put on new trades when the market is falling like it is right now—I just sit on the sidelines waiting for that eventual bounce.
Going against the trend is lethal for my system.
Mistake 3
The constant need to trade
A lot has been written about this.
FOMO, overtrading, and everything else that makes you put on trades you should not be putting on are just signs of indiscipline.
It is important to understand this:
Making money is your goal.
Trading every day is not your goal.
I put on trades to achieve my goal but I don't put on trades when doing so is likely to take me further from my goals—that is what happens when I try going long stocks in a weak market.
The constant need to trade
A lot has been written about this.
FOMO, overtrading, and everything else that makes you put on trades you should not be putting on are just signs of indiscipline.
It is important to understand this:
Making money is your goal.
Trading every day is not your goal.
I put on trades to achieve my goal but I don't put on trades when doing so is likely to take me further from my goals—that is what happens when I try going long stocks in a weak market.
Solution to Mistake 3
Once again back to market breadth - x.com/tradelyfblog/s…
I don't trade when breadth is getting weaker, and I trade aggressively when breadth starts getting stronger.
I can still lose money if stocks turn around again but at least I am now playing at better odds—just like poker, you can still lose with pocket aces but you are more likely to win.
Put on less trades and only when the odds favour you. You will make more money.
Once again back to market breadth - x.com/tradelyfblog/s…
I don't trade when breadth is getting weaker, and I trade aggressively when breadth starts getting stronger.
I can still lose money if stocks turn around again but at least I am now playing at better odds—just like poker, you can still lose with pocket aces but you are more likely to win.
Put on less trades and only when the odds favour you. You will make more money.
Mistake 4
Holding on to losers
It is very common for traders to hold on to losing stocks. You say "I will sell when I break even".
Why?
Is your goal making money?
Or is your goal to make money from that stock in particular?
A falling stock is more likely to fall more, and a rising stock is more likely to rise more. This is because it takes the collective effort of many market participants to make or break trends.
Holding on to losers
It is very common for traders to hold on to losing stocks. You say "I will sell when I break even".
Why?
Is your goal making money?
Or is your goal to make money from that stock in particular?
A falling stock is more likely to fall more, and a rising stock is more likely to rise more. This is because it takes the collective effort of many market participants to make or break trends.
Solution to Mistake 4
Plan your losses
If you read Market Wizards by Jack Schwager, you will notice that all kinds of traders have one thing in common—THEY CONTROL RISK.
Whether you trade forex, commodities, crypto, stocks or anything else—letting a small loss snowball into a bigger loss without any plan of when you will cut your losses is the biggest trading mistake you can possibly make.
Even though this is the most common and the BIGGEST MISTAKE, it also has the SIMPLEST SOLUTION.
You just have to make sure you never lose more than 1% of your account in a single trade.
Needless to say, this will vary with your trading style. This will ideally be lower for a day trader and can be higher for a positional trader. The actual % you decide to risk is not as important though, having a plan is the key.
Plan your losses
If you read Market Wizards by Jack Schwager, you will notice that all kinds of traders have one thing in common—THEY CONTROL RISK.
Whether you trade forex, commodities, crypto, stocks or anything else—letting a small loss snowball into a bigger loss without any plan of when you will cut your losses is the biggest trading mistake you can possibly make.
Even though this is the most common and the BIGGEST MISTAKE, it also has the SIMPLEST SOLUTION.
You just have to make sure you never lose more than 1% of your account in a single trade.
Needless to say, this will vary with your trading style. This will ideally be lower for a day trader and can be higher for a positional trader. The actual % you decide to risk is not as important though, having a plan is the key.
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