12 Reasons Why You’ll Never Be Profitable as a Trader or Stock Investor Part 3

Trading and investing for beginners often ends in dispair

Stock market investing and trading is a wonderful way to generate long term wealth, but it can be a minefield for many novice traders and investors. Understanding what makes you tick is the first step in the battle to achieve long term profitability.

This post is the second last in the series. Today we’ll examine three of the most common reasons why you’ll never be profitable as a trader or investor.

7. Failure to appreciate your risk tolerance

Your risk profile (also know as your risk tolerance) is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. It is how comfortable you feel with a given level of risk associated with an investment.

In tangible terms it is how well you sleep at night when you are invested in the stock market. If you find it hard to sleep, or you leap out of bed each more and race to the TV to see how the markets traded the previous night, you may be taking on too much risk.

Failure to appreciate your risk profile invariably leads to poor decision making. A prime example of this is the large number of novice and intermediate traders and investors who lose money simply because they try to trade an investment or trading strategy that is incompatible with their risk profile.

If you understand your risk profile you can design a trading strategy that builds on your strengths.

However, if you don’t understand your risk profile, you won’t appreciate how it’s affecting your mindset and you won’t recognize the impact it’s having on your decision making.

8. Giving up too early

This is probably the biggest killer of most novice traders and investors. You start out keen, you attend a seminar or read a book or two. You choose a trading strategy and you decide to give this newly learnt trading strategy a go.

You start following your trading strategy religiously and you have a couple of winning trades. You feel good about yourself, picking winning trades seems easy.

Then you begin to drift away from your trading plan. You bend a couple of trading rules but surprisingly the trades still work out.

Soon you become sloppy, you break trading rules regularly. Then you start tinkering with the system, trying to ‘refine it’. Trying to build the ‘perfect system’.

And then it happens…

BAM! You experience a devastating trading loss, a loss that wipes out most of your trading account.

If you’re like most novice traders and investors you start looking for someone or something to blame. You blame the trading strategy, your broker or the financial market as a whole.

You don’t take responsibility for your losses – but you’re not alone. This type of scenario is played out again and again by novice traders and investors.

Instead of taking responsibility for their mistakes most novice traders and investors look to apportion blame elsewhere. They fail to realize it’s their own lack of discipline that has lead to their downfall.

Uneasy about the possibility of losing more money most novice traders and investors will go down one of two paths.

They’ll either:

• Begin the endless search for a better system. Chopping and changing from one strategy to the next. Never really finding a strategy that works. This is known as the ‘beginners curse’.

• Alternatively, they’ll stop trading and either sit on the sidelines waiting for the ‘perfect opportunity’ or they give up completely through fear of losing money.

To overcome the fear of financial loss or a lack of discipline you need to start with a well defined trading plan. One that has clearly defined trading rules for stock selection, risk management, trade management and money management.

But having a comprehensive trading plan is not enough. You need to have confidence in the trading plan and strategy.

To be comfortable enough to follow a trading plan religiously you need to understand the probabilities of winning and losing that are associated with that trading strategy.

You need to appreciate that losses are a part of the game. And because they’re a part of life as a trader or investor you need to understand how the likelihood of loss and the size of those losses will impact on your mindset

Understand this and you’ll be well on your way to nurturing the strength needed to overcome your fears or the discipline required to follow your trading strategy day in, day out.

9. Overestimating your abilities

Ok let’s be honest, how many times have you considered yourself a better driver than the other drivers on the road? Be honest, it’s alright we have all done it at some time. Whether it’s our sporting prowess or driving ability, we have all been guilty of overestimating our level of competence.

Trading is no different.

Have you ever thought trading was easy? Do you think you can predict the markets or what a stock price will do? Have you ever confused a strong bullish market with your ability to pick winning trades?

If so, you may be overestimating your own abilities.

Overconfidence typically affects more men than women. But, regardless of gender the end result is the same. Overconfidence leads to over trading and this leads to poor results.

We often take more credit for our stock market success than is actually warranted. Learn to recognise the signs of overconfidence before it hurts your wallet.

If you would like more information on understanding what separates profitable traders and investors from the rest, take the simple step NOW to SIGN UP for my FREE E-Course ‘Mastering Profitability’. Its 30 days that could change your life…

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2. Leave a comment. Tell us what you find are the most difficult challenges you have faced or currently face as a trader or investor.