I’ve read some where before where most successful day traders don’t really trade for money; they do it out of self discipline much like a mountain climber or a triathlete. While that doesn’t say that all those who do eventually see demise, but it does say that it’s one of the desirable attributes for a successful trader.
I remember the many times that my positions got wiped out were precisely the case where I wanted to get rich quickly and went reckless and “all in”. Let’s see what happens behind the psychology when I do so.
- Reckless positions: inappropriately large positions
- Instant gratification: no patience to wait
- Fear: stock never go in straight lines so any volatility can easily shake you out of position
- Pride: in case you didn’t get shaken out due to fear you’d get trapped and possibly average down!
As opposed to appropriate swing trades where you have the risk tolerance to wait for your setup to play out, the get-rich-quick mentality almost guarantees you to lose unless you get extremely lucky. Even then, what’s the chance of you getting extremely lucky more than a couple of the times? In the long run, you definitely lose.
A similarly undesirable mentality is having to “get paid” everyday. You think day trading is a job, so you need to record profit everyday. This forces you to over-trade and the dynamics is pretty much the same as described above.
In Proverb 21:5, the Bible says:
“The plans of the diligent lead to profit as surely as haste leads to poverty.”
Steadily and slowly is the way to accumulate your wealth. Now while having the aforementioned mentality guarantees demise, it doesn’t mean not having such mentality will ensure profits.
Speaking of which, I am not a good investor for sure. So I lack trading skills and discipline, but I just can’t make money on investments either. That’s really discouraging. Any investment I was involved based not by technical analysis but by rationale and story lines had led to heavy losses. A few painful memories came to mind:
- Palm, which I invest because I loved my Palm Pilot;
- Tivo, which I thought would benefit greatly from the advent of PVR;
- Crox, where I bought the funky shoes for everyone of my family;
- Leap Frog, where I thought was the hottest holiday gift for the toddlers last year;
- A123, which was one of the few hot IPOs last year and I was sold by the vision of electric cars and the fact that it is MIT technology.
I know the list is a lot longer, especially if I were to include private placements. Anyway, today A123 (AONE) was down as much as 14% because it’s in need of secondary offering, without which it would run out of cash before the year end. Dilution is one thing, it’s marquis of currently private investors (including GE) not willing to step up and infuse more funds is even more troubling. I have 1000 shares and 5 May 7 naked puts. It dragged down my portfolio by over $1,600 today. Oh well! I had to do something today and added 5 May 6 naked puts near the end of day. Now I trickled in 100 shares at a time over many months, and my position size isn’t by all mean inappropriate, but I’m losing painfully and I am starting to lose faith in this stock.
The rest of the market made advances today, approaching the top. I’m trying to move back to cash soon.
Portfolio Value: $138.100