Ways to lose money in Wall street – my thoughts and reflections

I found this interesting list on Twitter on ways to lose money. It’s from Tape Reading and Markets Tactics by Humphrey Neill, published in 1931. A great find. I haven’t read the book.

I took some time to reflect.

  1. Put your trust in board-room gossip.

This one I’ve done a few times in the past when I was inexperienced. This combined with a non existing stop loss and a too large position size have done a lot of damage to my portfolios in the past. The worst part is not only losing money but also losing interest in trading and investing. It has made me stop trading and avoiding checking my portfolio. Staying in the game is crucial to continued learning.

2. Believe everything you hear, especially tips.

The same with this one. I’ve read somewhere that especially men have a tendency to want to be in the same “bets” as their neighbors. I guess men FOMO more easy than women. Myself included. It gets easier with experience in the market and with a change or a maturity of the trading mind.

3. If you don’t know – guess.

Not sure what the author means with this one. I do a lot of guessing. Educated ones or what I believe is higher probability ones. I treat my bets, both for shorter term and longer term, as 50-50. Perhaps with a slight favor for me. If I’m wrong my stop hits. If I’m right I keep it. If it goes sideways I have to consider opportunity cost. This is my current approach which I’m trying out.

4. Follow the public.

I try to avoid this and try to think what will the public do next? Which is the next hype?

I skate to where the puck is going to be, not where it has been.

-Wayne Gretzky

5. Be impatient.

This is where the Zen comes in or the sit-out power. When playing poker you have to fold your bad hands most of the time. In soccer you don’t take all shots, you take the higher probability ones. The other times you play it safe and pass backwards if needed to keep possession. I’ve read that some traders have the sniper strategy. I have to explore this one more since I think it could suit my personality.

Which trade has the best risk and the best reward?

Only by avoiding the beginning of things can we escape their ending.

– Cyril Connolly, The Unquiet Grave

Time opens every door to him who waits.

– Chinese proverb

You must learn to allow patience and stillness to take over from anxiety and frantic activity… The good player is patient. He is observant, controlling his patience, and organizing his composure. When he sees an opportunity, he explodes.

– Marital artist Jim Lau, quoted by Joe Hyams in Zen in the Martial Arts.

6. Greedily hang on for the top eighth.

I guess this means not to wait for the very top. To take profits sooner. That the risk/reward gets worse the closer the top or price target you’ve set.

7. Trade on thin margins.

I try to avoid trading with margin. I don’t have the experience and know-how.

8. Hold on to your opinion, right or wrong.

The market is always right. Meaning I’m wrong when the trade goes against me. This reminds me of the saying “Strong opinions weakly held”. Strong opinions leads to higher conviction and therefore higher chance of seeing a trade through. If the market goes another direction my opinion need to change quick.

9. Never stay out of the market.

For my strategy cash is a position and sometimes it’s better than being in a trade. They also say time in the market is better than timing the market. This is true in a long term bull market. This varies from timeframe to different regions.

10. Accept small profits and large losses.

It should be the opposite. This is a common mistake I also did when I lacked experience and everything. Cut losses early is my current main rule. Hard to do sometimes.

In my experience cutting losses early is key to a more positive mindset, better sleep and better returns. By avoiding any losses over 10%, my portfolio is more neat and I will feel better. The opposite would be having many positions which have gone down more than 10%. To watch them every day, every week or monthly will damage my psyche. I’ll just try to cut them lose early and it forces me to get better entries where I won’t get stopped out.

This table shows why it is important to cut losses early.

LossGain required to
recover the loss
-5.00%5.26%
-10.00%11.11%
-25.00%33.33%
-50.00%100.00%
-75.00%300.00%
-90.00%900.00%

To let my winners run and keep them is one way to have large gains. It’s not that easy though. It’s more easy to just cut losses early.

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