Now that you know it is sometimes wise to stay on the sidelines, you should only trade high risk-reward ratio plays, and you must always use a stop-loss, let’s move on our next topic: spending too much time staring at Level 2 screens, examining charts, and trading. Are you constantly trading after the closing bell and pre-market? Some traders dedicate all of their time to reading fundamentals, checking the news, and looking at charts.
Every trader needs to do these things, but you must allocate a small portion of your time to these matters, not all your time. You should try to avoid listening to the media, especially the analysts who lie, and you must try to ignore stock tips from your local banker. All of these different opinions can cloud your better judgment.
Many traders become frustrated because they work so hard and still lose money. Some work 18 hours a day or more, trading during lunch, watching CNBC while eating dinner, asking everybody for stock tips, etc. This is a common mistake by beginning traders. They do not focus their time on doing the things that will help improve their trading. Traders should be printing out charts of the stocks they traded that day, labeling the entry and exit points, and documenting their reasons for entry and exit. By doing this, a trader can find out what his common mistakes are as well as his strong points.
By reviewing these notes on the chart, the trader can clearly see if he is getting a bad entry, getting shaken out of position, taking a stop-loss of 2 cents only to see that he was actually right after-the-fact, or, more commonly, taking profits way to early. Traders must discover their worst habits and spend their time correcting them. They should also calculate their commissions at the end of every day, including SEC fees, pass-through fees, and any other charges.
This gives the trader time to reflect on the cost he is actually incurring when he gets into low risk-reward ratio positions and make him think twice about doing it again. Every trader should devote more time to reviewing and correcting errors instead of spending their time actually trading.