Making mistakes is part of the learning process for all investors, but all too often, it’s plain old common sense that separates a successful investor from a poor one. At the same time, nearly all investors, new or experienced, have fallen astray from common sense and made a mistake or two. Being perfect may be impossible, but knowing some of common investing errors can help deter you from going down the well-traveled, yet rocky path of losses.
One of the best ways to become a better investor is to learn from other people’s mistakes. Based on this experience, the most important advice anyone can offer to investors is to: Have an investment plan. Know why you are buying a stock, and know what you are looking for on the trade. If you just take a step back and think about what you are doing, you can avoid a lot of mistakes.
He is a quick and simply four-step process from successful stock market traders that offer advice for investors. Four-step process includes:
1. Learn from experience
For any trade that is instructive (winner or loser), write down what you learned about the market from that trade. It doesn’t make any difference whether you keep a trader’s diary or use the back of business cards, the important thing is that you methodically record market lessons as they occur.
2. Develop a trading philosophy
Compile your experience-based trading lessons into a coherent trading philosophy. Two points should be made here. First, by definition, this step will be unachievable by beginners because it will take the experience of many trades to develop a meaningful trading philosophy. Second, this step is a dynamic process; as a trader gathers more experience and knowledge, the existing philosophy should be revised accordingly.
3. Define high-probability trades
Use your trading philosophy to develop a methodology for identifying high-probability trades. The idea is to look for trades that exhibit several of the characteristics you have identified as having some predictive value. Even if each condition provides only a marginal edge, the combination of several such conditions can provide a trade with a significant edge.
4. Have a plan
Know how you will get into a trade, and know how you will get out of the trade. Many investors make the mistake of only focusing on the former of these two requirements. Not only have a specific method for selecting and entering trades, but it’s a good idea to also have a plan for
liquidating trades. Exit a trade whenever one of the following three conditions are met:
- Your profit objective for the trade is realized;
- The expected catalyst fails to develop or the stock fails to respond as anticipated;
- The stock fails to respond within a predefined length of time (the “time stop” is triggered).
