Investor trader and author, nicknamed Concoda, in Note The Medium website raises questions that if any investor asks themselves before entering into a particular trade, they can avoid many common mistakes in their investment process. This is not an investment advice, but a guide to planning routine plans before you start trading. You can read the following article quoting Concoda.
I received the best investment advice of my life during a conference held in 2014. One speaker explained how even the best investors make the same old mistakes over and over again, mistakes that eventually lead to huge losses and destroy any previously hard-earned profits. The speaker stated:
Do not think that you are safe. Do not be confused by losing capital. Think about the root cause of this loss and write it down. Over time, this is the only effective way to detect errors that you do not realize.
Based on this advice, I have prepared a complete list of points that I should follow before making a deal. This list includes a set of questions that I must ask myself before entering into any trading or investing. Having this list helps me avoid big investment mistakes and, more importantly, make profitable trades in the long run.
I made every big mistake you can imagine in investing and trading, and finally came up with a list of ten important questions that helped me avoid losing thousands of dollars during my investment period. In the following, I will share these ten questions with you.
1. Do I enter into a transaction following the group?
Entering into a deal with the majority of traders is a big mistake that every investor makes at least once in their lifetime. We are fascinated by deceptive news, we succumb to temptation, and without hesitation we join a large number of people, all of whom take a similar position in relation to a deal.
But a few days later, the big traders in the market, who have been trading for months and realize that many traders are looking at the future of this asset as bullish or declining, suddenly break away from the crowd and take a different position. Whether it’s gold, Apple stock or orange juice, you lose some of your assets and get out of the deal with a 10% loss. So keep in mind that the fact that so many people agree on an issue does not necessarily mean that it is true.
To avoid this mistake, ask yourself if you are late. Are you planning to buy an asset when its price has peaked and the market is saturated? Do you become very anxious if a large-scale sale starts? If your answer to one or more of these questions is “yes”, know that you are entering into a deal with the majority, and in the end, you will either suffer heavy losses or make a small profit.
۲. What is the profit and loss of the transaction?
I still remember the day I saw my biggest trading loss. I was sure of the profitability of the short deal for the shares of Red Hat Technology Company. I had made all the necessary estimates. I knew that the company’s revenue growth was on the verge of collapse. So I made this deal.
Three days later, IBM announced that it was going to buy and merge with Red Hat. The result was a 50% jump in Red Hat shares. I and the other people in the shorts had no time to react. My stock fell sharply and it took me three weeks to make up for the losses.
If I look at the half-full glass, I learned the most valuable lesson in risk management in this transaction; Always be aware of your potential gains and losses, especially in long and short trades. Now that I look at that deal, despite the tremendous profit it could have made for me, I never calculated the risk of an unfavorable price move and a loss. I forgot that I am shortening the shares of a technology company and I am exposed to unlimited losses. To reduce risk and loss, I could simply buy put options.
After that transaction, I always estimate and note the potential profit and loss, for example:
Shortening stock rejection
Potential benefit: $ 50,000
Possible losses: Unlimited
Purchase of red hot sale option contracts
Potential benefit: $ 50,000
Possible losses: $ 2,000
I learned this lesson well.
3. Do I have enough experience and knowledge?
If you are lazy, the market will find you very soon and will punish you for trying to get rich overnight. You can get rid of laziness by trading assets that you are interested in and have gained experience trading; Because with more trading and effort, you will become more aware and enjoy trading more.
Invest in assets that you know of. The rest of the assets are unknown territory.
4. Is it too early to make a deal?
Early entry into the transaction is a polite expression to make a mistake. If you enter the trade early and have to reduce the loss, you have probably made one of the big trading mistakes: War with trends.
If you fight the trend, you make two irrational claims; The first is that the market, or the collective mind of more than a million market traders, is wrong, and the second is that you are skilled enough to recognize price caps and ceilings, which is almost impossible.
Entering the deal in the opposite direction is a dangerous game. It will definitely be profitable in rare cases; But if you often think like Michael Burry or Steve Eisman, you will end up losing all your capital.
Michael Barry and Steve Eisman are two traders who gained much of their trading fame during the 2008 financial crisis. At the time, when most people were suffering heavy losses, the two traders made huge profits in an unbelievable way by taking a very high-risk, market-oriented approach.
A famous quote on Wall Street says:
Cows benefit, bears benefit, pigs are slaughtered.
5. Do I have to make a deal?
Large financial companies open up large capital positions in various asset markets. Therefore, in order to make a profit and get out of the situation, they need to have enough liquidity on the other side of the transaction. One of the well-known tricks used by some companies is to use mass media to persuade small investors to trade in the opposite direction of the market. This is not an honorable thing to do; But it happens. Therefore, beware of these kinds of deceptions.
To avoid losses, ask yourself how you first became aware of the situation and the deal before buying. Was it through an individual, company or institution that has a conflict of interest with you? If so, think more and become more aware of this particular situation. This can prevent huge losses for you.
6. What effect does this transaction have on the diversification of my portfolio?
Each time you add a position to your portfolio, you change the layout of your portfolio. Your entry into a particular asset class, area, or stock will upset the balance of your stock portfolio, and this imbalance may be hidden from your view. Recognizing how an asset affects your portfolio risk is crucial. Find the weaknesses and defects in their structure. In that case, if something bad happens to your portfolio, you will be prepared for the consequences.
7. What is my replacement plan?
Once you are in a situation, think about the possible reaction to the possible and common scenarios that may occur. If the trade breaks down, do you still maintain the position or get out of it? If the deal turns profitable, will you be completely out of the position or leave half of the capital?
These questions not only prepare you for the future, but also help you eliminate inefficient ideas from your trading plan. By doing this, you will have a practical plan that will give you everything you need to know.
8. Is it too late to enter into a deal?
Delaying a deal is another polite expression for making a mistake. Buying an asset that has reached its peak price is much worse than trying to buy an asset at the lowest possible price. Buying at the peak is more of a failure than a mistake.
However, we can all make mistakes. Charts have a strange ability to awaken the demon of greed that is hidden in us. If we see Tesla stocks skyrocket to $ 1,800 or gold rise to a staggering $ 2,000, we can not resist succumbing to the fear of falling behind (FOMO). We join others in buying that asset. But after a week, the market is falling sharply. Only then will we realize what a foolish decision we have made.
It is not difficult to prevent this mistake; You just have to change your mind. If you come across a chart and price that has grown in the form of a stock curve, skip it and move on to other assets. You have lost this price increase.
9. I am tired?
Trading out of boredom and boredom is the fastest way to lose capital. Unless you have a specific reason for investing in a particular asset, you probably won’t make a profit. If, before clicking the “Buy” or “Sell” button, the phrases you use are, “How ridiculous!”, “What else do I have to lose?” And “Why not?” You are trading out of boredom and boredom. At the time, it may not be clear, but once you have accumulated losses, you will ask yourself why I got into this deal from the beginning.
10. Why did I enter into this deal at all?
Sometimes, you just have to ask yourself:
Why do I have to invest the hard-earned money in these turbulent markets?
This simple, instructive question can protect your capital wherever you can think of. Perhaps the reason you enter into a particular deal is greed, fatigue, or fear of losing, which you will not realize if you do not ask yourself this question.
On the other hand, if after hours of coherent and reasoned analysis you come up with an idea that you are absolutely sure of, it is time to enter into a deal.
Closing remarks; Everyone is directly responsible for maintaining their capital
Ask yourself these questions every time you plan to invest. You will then be amazed at how easily you can identify potential flaws in your trading plan, how quickly you realize that cognitive biases have forced you to enter harmful trades, and how dangerous poor risk management can be.
But most importantly, over time you will learn how to protect your capital, avoid mistakes, haste, and mistakes that ruin your opportunities, and become a successful investor forever.