Chapter 5: Common Mistakes

Market is just like a magnet, if you are making money, you can’t leave it as you are making money; if you are losing money, even then you can’t leave it as you want to recover whatever is lost. In short, whether you are making money or losing money, you just can’t leave it. A trader loses small amounts initially almost every-day. One day he would realize that he has already lost a big amount in trading during last few months. Now, he would start bringing his savings & earnings in stock trading to recover whatever is lost. This is an entry to the disaster world. Once a trader is habitual of mistakes, he would not realize that he is committing the same mistakes over & over again.

When a trader starts trading he may commit several mistakes which would lead to losses. These mistakes are repeated many times till they realize that everything is lost. During trading we have observed that the mistakes committed by different traders are more or less same. It’s the traders’ mentality which persuades them to commit these mistakes again & again. A trader may commit these mistakes from the first day to the day till they realize their mistakes. If a child gets an entry in a school where wrong fundamentals are taught, he would never realize that whatever he is learning is wrong. There are two different schools of trading where different trading strategies and fundamentals are taught. One trading school may say that never ever make a losing trade; another school may say that losses are part of trading, don’t allow your losers to turn out of be disastrous. One school may say that book profits as soon as possible whereas another school would say ride your winners with trailing stop loss. One school may say that buy the lows & sell the highs whereas another school may say that buy the highs & sell the lows.

We will discuss in detail the common mistakes of a trader. I can assure you, if you can control these mistakes, you would definitely become a successful trader. Mistakes derail you from the journey of becoming a successful trader. In this chapter we will discuss about these common mistakes & we would give you the solution to overcome these mistakes. So, read carefully, if you are committing these mistakes, admit these & try to overcome the same instead of giving useless reasons for these mistakes.

1. Playing against the Trend: –The biggest mistake of a trader is that he always tries to contradict the markets. When market starts moving up, after a small rise they expect the markets to come down; on the other hand if market starts falling, after a small fall they expect the markets to start rising. They don’t allow the markets to rise or fall in a trend. A trader would always like to see a range-bound or sideways market, whereas most of the time markets move in trends. Every-day is a new day for a trader & trend of the market is different every-day in many ways. As well said by experts:

“Always expect the unexpected in the markets.”

In general, a trader wouldn’t buy a stock which is 5% or more up from its previous day’s close whereas he wouldn’t short a stock which is making new lows. A trader is comfortable buying a stock which is trading lower & short a stock which is trading higher. These are all mistakes and causes for losses for a trader. Buying a stock which is hitting new lows or selling a stock which is hitting new highs may be a good strategy for a long-term investor, but not for a trader. I would like to give you few examples here:

• If market opens up 1% or more & a particular stock is trading 4% higher; it means there is something positive about the stock. Stock trend is stronger than the market trend. So, you should buy this stock, don’t sell.
• If market opens down 1% or more & a particular stock is trading 2% or more up, it means investors are positive about this particular stock. If market would start recovering this stock would run faster than other stocks as the stock trend is positive whereas market trend is negative. If you want to buy in a weak market, buy this stock, don’t sell.
• If market opens down 1% or more & a particular stock is trading 4% down, it means sentiments about this stock is negative in the market. Stock trend is weaker than the market trend. So you should be short-selling this stock, don’t buy.
• If market opens up 1% or more & a particular stock is trading 2% or more down, it means market is negative about this particular stock. If market would start falling, this stock would fall faster than other stocks as the stock trend is weaker than the market trend. Therefore, if you want to short-sell in a strong market, short-sell this stock, don’t buy.

In nutshell, follow the principles of ‘Trading Equation’ as mentioned in other chapter of this book. You should follow the market trend along with the stock trend. If market trend & stock trend are contradictory, then stock trend is more important than the market trend. Never ever short new highs or buy new lows.

“A good trader is never afraid to buy a stock which is hitting new highs & short a stock which is hitting new lows.”

2. Missing Outs: – I would like to mention here that ‘out’ is referred as ‘stop loss’ here. Stop loss is one of the must do things for a trader. Most of the traders say that stop loss eat out their profits or part of capital. Traders keep stop loss when they establish the position but they remove the stop loss once stock approaches towards their stop loss price. Traders need to understand the importance of stop loss in day-trading.

“Stop loss is not a loss but its insurance against your loss.”

Stop loss will not only protect your money but it also provides an opportunity to make money in other volatile stocks. Stop loss means knowing your risk. The risk appetite of every person is different. Trading can’t be done without risk. If you want to be successful in trading, just learn to book losses. If you can’t take loss you will miss out on opportunities to make money in other trending stocks. If you have made a wrong decision by making an entry into a stock, you don’t have to carry that position for long; just book loss in the same stock and move on to the other good stocks. There are certain things which need to be taken care while deciding about stop loss:

• Stop loss should not be decided on the basis of price, but it should be decided on the basis of important levels in a stock. These levels can be found out on the basis of price movement or technical analysis. Some universal numbers such as 100, 500, 1000 etc. can also be considered as universal support & resistance levels.
• Stop loss should give you a favorable risk-reward ratio. It means stop loss should be smaller than the target. If you are keeping a target of Rs.2 in a particular stock, the stop loss should be less than Rs.2. If in any stock stop loss is not favorable look for other opportunities.
• Once stop loss is decided, never try to miss that stop loss price. Book your loss, if you feel stock may recover, you can always have the option to re-establish the position.
• Many times a stock may hit your stop loss & come back but it doesn’t mean that you shouldn’t keep a stop loss. These are few cases but most of the times stop loss protect you from huge losses.
• Sometimes, you may miss your stop loss due to technical problem or any other default. What to do in this situation? Don’t panic, stay calm & look for the next important level in the stock & don’t miss that. Don’t try this strategy in all positions.
• If your stock starts moving in your favour, you should trail your stop loss to the next level. For example, if stock is trading near target-1, you can trail your stop loss to or above cost price. This strategy of trailing stop loss will help you to reap bigger rewards in the same position.

The concept of ‘Trading Table’ is designed on the basis of stop loss & target. Most of the disciplined & successful traders across the world work on the similar concepts.

3. Trading in Hard Money: – Let’s first understand the concept of hard money & easy money. A trader can make more money in volatile markets than calm markets. A trader needs more volatility, more movement to make good money in equity markets. A trader just can’t wait long for profits. If markets are not moving, he will keep jumping from one stock to another stock. Thus, at the end of the day he would close making or losing a couple of bucks with huge volumes & high number of stocks, where he would be losing on brokerage & other charges.

When there is more volatility & movement in the markets, it’s generally called as easy money. When there is less volatility & movement in the market, it’s very hard to make money that’s why it is known as hard money. Markets are more volatile just after opening & just before close; whereas, markets may move in a small range during rest of the day. In trading time management is very essential & for time management one should be very strong to differentiate between hard money & easy money. Following points should be taken care of in order to understand the concept of hard money & easy money:

• Generally first & last hour of trading is considered as easy money. But, when there are important announcements etc. expected, the market may take big swings even during the day. Make note of the same before the market open & capitalize on the opportunities available during those hours.
• Successful traders make most of their trades during easy money. According to a study, successful traders make 80% of their trades during easy money. On contrary, most of the unsuccessful traders they make maximum of their trades during hard money. They look for confirmations before entering in a trade.

Risk-reward ratio is more favorable in easy money. The traders can ride their winners & reap bigger rewards on the same positions. Whereas, risk-reward ratio is very much unfavorable in hard money. Stocks move in a small range therefore not much of the opportunities are available for making money. Follow-up moves are made during easy money & stocks also move in trends.

• Many traders may make good trades during the morning session. But, it’s a test for the same trader to hold on to the nerves during hard money & protect his profits. When it comes to closing add to the profits whatever is made. The strategy should be to risk a little to make more. Don’t risk all your profits in hope of bigger profits. Always remember, in trading, a good beginning doesn’t mean a good end; what matter at the end of the day is the color & size of the closing number.
• Most of the stocks make their highs & lows of the day during easy money. They extend the moves during easy money & consolidate during hard money. Being a trader, you should always be ready for violent moves in the market & try to capitalize on the same.

Good traders manage hard money & easy money very well. Bad traders look for safe or less volatile stocks to make money, but remember less volatility means less money. Don’t try to fight the fundamentals of trading. Find stocks where you can make easy money, it means stocks which are moving & trending. Differentiate between hard money & easy money.

“Hard money is hard to earn & easy money is easy to earn.”

4. Entering a Trade without Reason: – A trader sits in the market for hours in order to gauge trading opportunities & capitalize on the same. Don’t enter a trade without a logical reason. If your reason for entering a trade is something vaguer like, “ I thought I saw buyers, and last week it had news, and it just looked good,” then you don’t belong in that trade! Most of the traders usually have no clearly conceived, written, organized trading strategies because they are lazy. They are doomed to failure.

If you have no solid reason for a trade you will have no confidence in it. You will wind up mis-timing, mis-judging, fumbling and losing. I think the most important thing to do is to develop a system that you have confidence in. You will get nowhere if you are second-guessing in whatever you are doing. When the market is open you need to know what you are doing, and why you are doing it without thinking too much about it. If you start thinking too much about, what you are doing or second-guessing yourself, you will quickly get taken out of the game.

Believe it or not it doesn’t matter much what your reason is, as long as you are consistent with that reasoning. But you’d better have a reason.

You should flexible enough to change your game plan according to market volatility. Look at the chart given below, the market opened around 4920 & it started falling, you shouldn’t be in a hurry to make an entry. What you can do here? You can design a flexible strategy; if market breaks important level of 4900 on the downside, you should be shorting the market & if it breaks 4925, you should buy it. After touching a high of 4950 during mid-day, the market consolidated in range of 20-25 points. Again you can design a trading strategy towards the closing of the market & the strategy can be short if it breaks 4925 on the downside & buy if it breaks the previous high of 4950. This is how you make trading strategies in live market scenario.

Following can be the some of the logical reasons for making an entry into a trade:

• If the stock has crossed any important support of resistance level.
• If previous day’s closing price of the stock was near 52 week high/low or all time high/low.
• If there is any announcement or news expected from the company.
• If stock is trading near day’s high or low.
• Any technical formation on the chart of a stock.

5. Trading too many stocks & trading too many tickets: – There are more than 12000 shares listed on NSE & BSE. A trader just needs to find few of the volatile stocks to make money. Traders keep jumping from one stock to another in search of trading opportunities. But at the end of the day, they have nothing in their hands trading too many stocks & too many tickets. If a trader sticks to limited number of stocks & find opportunities in the same, he may capitalize these opportunities & end up the day with decent profits. If you trade too many stocks, it may divert your concentration and persuade you to miss out on most of the money making opportunities.

Generally, brokerage & lots of other charges are included in each trade you make. If you are a day-trader, your transaction cost at the end of the month will be very high. These transactions cost eat out substantial part of our profits. For Example, if your transaction cost is Rs. 5000 per crore & you are making average transaction of Rs. 10,00,000 daily, it will affect your profits as follows:

 

Day	Turnover	Profit/(Loss)	Transaction Cost	Net Profit/(Loss)
1	800000	2250	400	1850
2	1100000	-1500	550	-2050
3	1400000	-400	700	-1100
4	700000	1250	350	900
5	1000000	2500	500	2000
Total	5000000	4100	2500	1600

As you can see here, higher turnover doesn’t mean higher profits. On day 1, the trader made transactions of just Rs. 8,00,000 & made a decent profit of Rs. 2250 which is Rs. 1850 after cutting transaction cost. Whereas on day 3, when he recorded the highest turnover of Rs. 14,00,000, he made a loss of Rs. 400 & after including transaction cost it comes to Rs. 1100. In general, if you notice most of the traders record higher turnover on down days & lower turnover on days when they made decent profits. In India, the charges which are included in transaction cost are brokerage, securities transaction tax, stamp duty, turnover tax & service tax. In US, the transaction charges are brokerage, ECN Charges & other Govt. levies.

One ticket means one thousand shares. You should limit your transactions to number of tickets. You can fix up the amount you want to put in each trade or alternatively you can fix up the quantity you want trade each time. For example, you can put Rs. 1,00,000 in each transaction or you can buy 100 shares every-time you make a trade. This would help you to follow discipline & limit your losses including transaction cost. After every 5 trades you can review your performance, if it’s a good day increase the tick size & if it’s a bad day you should get slow or reduce your tick size.

Following are the certain things which you need to take care while trading:

• Don’t trade too many stocks in a single day. You can limit 5-7 stocks for trading in a day.
• Limit the total turnover for the day. Keep it lower on down days & higher on up days.
• Fix up the amount or number of shares you want to put in each trade.
• Don’t carry more than three positions at a time.
• If you made three bad trades, go back, take a cup of coffee or whatever, review your trades & start again. If you have made two bad trades in the second-sitting, it’s a bad day for you, close for the day.

6. Holding Margin Positions: – Most of the traders don’t trade on cash, they trade on margins. Trading on margins is not a bad idea at all. But margins should be utilized in a very intelligent manner. As we all know, debt can make or break anyone, it depends on the person how he utilize it. An intelligent person would utilize debt to create assets. These assets will generate income for the long-time. Whereas, a dumb person would utilize debt for current expenditure which would eat out his future earnings. Margins are daily debt for a trader. If you carry this debt for more than a day, it may make you suffer huge losses. It may make or break wealth for any trader. Markets will not be affected by an individual’s profit or loss.

“Equity markets are ocean of money; it will not affect whether you put in or take out a bucket of money.”

Let’s assume a short story here. Mr. Tom is a person who is from a group of regular traders, but he himself is not much experienced in trading. He has seen people making good amount of profits through intra-day or short-term trading. He thought of making trading his full-time profession. He started his trading with an amount of Rs. 1,00,000. He thought of making 10%-15% monthly during initial stage. He started trading in a much disciplined manner & almost achieved his targets during initial months. Then his brokers told him that he is a good trader and can utilize daily margins provided by the broker. He was provided 5 times margins. He again started in a disciplined manner, but one day towards the close of the market his position got stuck in losses due to some technical problem. He thought he may cut out the positions next day with some decent profits. But next day markets opened lower & again he thought markets may recover in the second half, then I would cut my positions may be at break-even. At the end of the day his stocks didn’t recover & the position was cut by his broker at a loss of 3%. This was not only 3% loss, but if you calculate on the principal amount this would come around 15%. But Mr. Tom thought of recovering the loss as soon as possible. So, he asked his broker to increase the margin limit. As he was a regular trader, his broker increased his limit to 7 times. Now, he is left with principal amount of Rs. 85,000 or an intra-day margin of Rs. 5,95,000. In order to recover the previous losses, he started committing the mistakes which are dangerous for any day-trader, e.g. averaging, playing against the trend, not keeping a stop loss etc. Then at the end of second day, he again got stuck into few positions & the same process got repeated. This time he lost bigger amount about 4.25% of the amount invested. It means on principal amount he actually lost about 20%. Now he is left with Rs. 60,000 which is just 60% of his initial investment. He lost 40% in few trading sessions due to mis-utilization of margins.

Margin trading can be good & it can be as dangerous as anything else in trading. Take care of the following points while doing margin trading:

• Don’t carry a losing position. If you are in a position & you are losing money on the same & expecting the stock to close near lows of the day, don’t carry such positions. For example, if you bought shares of a company at Rs. 250 & currently the stock is trading around Rs. 245 with lows of the day at Rs. 243. Cut the positions immediately. If you carry such a position & next day stock opens 2% down, it will add to your losses. In short, the stock would open around Rs. 240 & you would be losing Rs. 10 per share. In this case, you can cut the position at Rs. 245 & look to re-establish next day; it doesn’t matter whether stock opens up or down.
• You can carry a profit position in certain cases. If you are in a position & making some gains on the same; you can carry such a position in order to extend your gains. For example, if you bought shares of a company around Rs. 250 & currently the stock is trading at Rs. 255 with highs of the day at Rs. 258. You can carry this position, as you have Rs. 5 as margin of safety. If stock opens up next day it will add to your gains & if it opens down you may always exit at break-even or may lose a little in worst case scenario.
• Generally a stock closing near highs would extend its move next day & a stock closing near lows would fall further. Therefore, never ever carry a losing position, whereas you can carry a profit position in certain cases.

A Cautious Note: “We don’t recommend carrying any position to next day for intra-day traders.”

• Once you are experienced, you can find out which position should be carried and which shouldn’t be. Another important point which I would like to mention here that if you carry a position you would be charged delivery brokerage instead of intra-day brokerage which would be 10 times higher. Your transaction cost would be much higher than your expectation. For example, if you have bought shares worth Rs. 5,00,000. Consider intra-day brokerage at Rs. 5,000 per crore & delivery brokerage at Rs. 50,000 per crore. Your transaction cost would be calculated as follows:
  • Intra-day: Rs. 250/-
  • Delivery: Rs. 2500/-

In nutshell, if you carry a position take care of your losses & transaction cost. Sometimes, it may eat out your money even without giving you any hint. So, be careful.

7. Revenge Trading: – In trading, if anything is bad, it will remain bad as long as you will stick to it. There is only one way to get rid of it i.e. change your stocks. Revenge trading doesn’t allow you to exit from bad stocks & enter good stocks. Remember, stocks are not living objects; you don’t have to be emotional with specific stocks or companies. It’s not possible in trading that you may make money every-day in the same stocks.

“Don’t marry a stock.”

Every-day is a new day; you need to find out new stocks on daily basis to earn profits. We have discussed about stock selection in a separate chapter. Stock selection is one of the most important elements of successful trading. There are two major drawbacks in revenge trading which are as follows:-

• It will make you a blind trader. A blind trader is someone who misses out on all other opportunities available in the market. He sticks to the stocks where he has lost money in earlier trades. He is not able to understand that if he is losing money in a particular stock, he doesn’t have to stick to it, change the stock & recover the losses. He need not to be emotionally attached with a particular stock as it’s not a person to take revenge from.

“Money is money man, it doesn’t matter whether it’s from A Ltd. or X Ltd.; what actually matters at the end of the day is profit.”

• It will make you a dumb trader. A dumb trader means a person who forgets all the principles of successful trading in order to make revenge trading. Sometimes, he may change his personality from day-trader to short-term trader or may be even to an investor. They carry the positions which are giving them losses. They commit mistakes like not keeping a stop loss, averaging, carry margin positions etc. You have to become a wise trader in order to get rid of revenge trading.

Revenge trading is very dangerous. Don’t let your emotions involved in stock trading.

“Trust your intuition, control your emotions & avoid revenge trading.”

I can assure you most of the unsuccessful traders in the universe have committed one or more of the mistakes mentioned here. There is no other mistake in trading which can lead to disaster. If a trader can avoid these mistakes & execute discipline, there is no one who can stop them from becoming successful trader. Let’s once again summarize these mistakes for you:

 

1. Playing against the trend (Short new highs & buy new lows.)
2. Trading in Hard Money
3. Missing Outs
4. Entering a trade without reason
5. Trading too many stocks and trading too many tickets
6. Holding Margin Positions
7. Revenge Trading