Thursday, June 26, 2014

Here's my latest can't lose trade - guaranteed winner!

Yeah, right. A trend follower who's wrong more than 60% of the time giving out a guaranteed winning stock tip???  You should know there's no such thing as a can't lose trade. Most of you who have clicked on this post will know that. However, some will be drawn in merely by the promise of a guaranteed winning tip, and it is those who this post is addressed to.

A lot of traders are so gullible when it comes to following other people’s tips, particularly on places like twitter or stock twits. With most, it is downright dangerous to your equity to act on a tip. Why is this?

Simple. Other traders may have completely different reasons for entering or exiting a position, which may be completely at odds with your own ideas or method. They may have different timeframes or preferred holding periods, as well as different attitudes towards risk. With some, there may be an ulterior motive for disclosing a trade (e.g. pump and dump merchants). The bottom line is, in the vast majority of cases, you have no detailed knowledge how those traders trade the market.

In addition, stock picking services or tipsters are quite happy to provide entry signals, but in a lot of cases go quiet when a trade fails or they exit their position. Quite often gullible traders end up with big losses as they buy in on a hot tip, but they don't know when to get out. 

Even worse, if price starts going against them, they receive another tip - buy more of the same stock, and average down your entry price! In that scenario, it is all too easy to see how people can lose significant amounts of money. 

If only they had spent some time working out a trading and risk management plan that they are comfortable with. But no, they couldn't be bothered to do that. They wanted to make money - fast!!!

The whole purpose of creating a complete trading plan is so that you are fully comfortable in following your own rules for entries, exits etc. If you have such a plan, you will have no need for hot tips.

To my mind, relying on other people for tips or opinions is an easy way out – if something goes wrong, that trader can easily blame whoever provide the tip. Blaming others happens far too often and all too easily. Failing that, they will blame their broker. Or the market. Or their trading platform. Anything other than themselves.

When a trader enters the market, they must learn to accept full responsibility for their own actions. You and you alone create the profit or loss – nobody else. You also create the magnitude of those profits or losses depending on your own risk parameters and position sizing. To blame anybody else is a cop out.

Have faith in yourself - construct a proper plan, with good risk control, and leave those who rely on hot tips behind. You'll find, in the majority of cases, those traders will be on the other side of your future trades.

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