This is a quote from author Carson Block I saw on Twitter over the weekend and it made me think a lot about a recent trading experience and how I keep repeating the same mistakes on my personal account. The mistake is starting to become a bit repetitive and I need to find a way to address it to protect my trading capital.
Here is my experience. A few weeks ago I opened a Contract For Difference (CFD) account with IG South Africa; I took long positions on Old Mutual and on Richemont.
In other words I expected them both to rise. Sure enough, Old Mutual nudged upwards and I made about 40% on the trade and then I was fortunate to ride the Richemont roller-coaster on Friday and made a very healthy profit.
In a nutshell, I had doubled my money in my trading account in less than two weeks on relatively low-risk trades.
At any point in time, I could justify:
- Why I had backed both Richemont and Old Mutual; and
- The amount of capital and stop-losses I had allocated to them.
The profit was there and it was banked.
Unfortunately, my low-impulse control kicks in and suddenly I see a tweet saying that AngloGold is going to fall to R84 and another article somewhere saying there is more pain for resources. What do I do? Log on to my IG account via my phone and start trying to short AngloGold and Exxaro, which both then proceed to jump on a weak rand.
Suddenly my profits are down 20% and I’m sitting in positions I didn’t really give a lot of thought to. I then spend the weekend trawling news sites for stories that will justify that gold shares are going to crash and that Exxaro earnings will be under pressure.
Now I might get lucky today and the shares might fall and I may end up looking clever, but there is a similar risk that it goes the other way.
Having spoken to a number of traders, many of them recommend you do a couple of things to help you better understand yourself and your decision-making.
- Start a trading diary and understand what motivated you to make whichever decisions you did.
- Write down what you think you did wrong and revisit it before putting your next trade on.
- Once you have made a profit walk away and regroup.
- You don’t need to always be in the market.
Geared instruments are both a blessing and a curse because of the speed at which they build or destroy profits, but if you are going to play with them then be sure you understand yourself before you even try to understand the instruments.