When we all begin dreaming trading or investing, we are almost all guilty of thinking about the Ferrari, the mansion, the women, the recognition etc. There is nothing misguided about those hopes and thoughts. However, as a beginner trader it does have the potential to be dangerous for a number of reasons.
One reason it can be dangerous is because those thoughts can be used against us. You and I have seen “Trading Gurus” or “Business Gurus” all over the internet and time and time again they try to catch our attention not by showing us trading, but by parading our dream cars with women on top of them parked in front of houses we envision being in. Showing dream vacations and travelling, and mind you, even that is not the real problem. The problem is the intent. Most of those people are not simply showing you because they believe ” You can do it to”. Its more like ” You can do this too…if you buy my course.” “You can do this too…if you join my chat room.” “You can do this too….if you pay to attend my seminar.” Long story short you have a great chance of spending for a high priced subscription or course that in reality, you can often find online for free. Now, that isn’t to say that there isn’t great chat rooms and stock trading courses or business courses, but be skeptical of the ones that are trying to entice you with shiny things more than talking about the actual process.
While that is one that beginner traders often don’t notice, that is not the number #1 thing they don’t focus on.
The number 1 thing most beginner traders don’t focus on is Protecting Capital vs Making Money. Now at first many may think “what, i thought i was here to make money”. Correct, we are all here to make money at the end of the day, but are main priority when putting on live trades is how can i protect the money that i have at risk FIRST. Instead we often think the opposite, ” OH Man, i could make $400 dollars on this trade”. The reason why this is important is if you use the mindset of protecting your capital first, you automatically start using more risk tolerant strategies. I will give an example:
When I was focused on how much money I could make first, i often didn’t use stop losses, I continued to adjust my mental stop so that i could give the stock more room to hopefully rise back in my favor. What ended up happening was an initial risk of what was suppose to be $40 dollars would now be a $85 dollar loss
When I was focused on how to protect the money I had risked and also reduce my risk, I always remembered to use a stop loss. I once forgot to put a stop loss in but because i was focused on protecting my money, I immediately got out, even though the stock was moving in my favor. I would also actively remember to adjust my stop closer to my entry point as a stock would go in my favor, which reduced the risk even more. By the time my stop loss is at my entry, a huge weight was lifted off my shoulder and i could now let the stock move with me worried about losing money , which is a very comfortable position to be in.