By Joe Duarte

Trading is all about preparation with a hefty dose of obsessive compulsive attention to detail, and the understanding that things could go against you, which is why risk management is your first objective. Following are four don’ts you should consider.

Don’t avoid losses

There is an old adage in trading: Keep your losses small and let your winners roll. What that means is that one way or another, you will have losses in your trading. It’s not a beginner’s trait; it’s simply a cost of doing business. As a matter of fact, taking small losses is a skill that’s developed by experienced traders. Try to get to that level sooner than later.

Avoiding losses is a sure way to make them bigger. You can follow your rules and see positive results with a series of small gains and losses, only to have the slate wiped clean (and then some) with one big loss. It’s a discouraging setback, and one that will happen no matter what you do, because you don’t control the markets.

The key is to change the way you think about trading. By shifting your view of what constitutes a successful trade from one that is profitable to one that follows your rules, you’re on your way to true success. To be sure, this is so counterintuitive that it will be difficult. In fact, you can tell yourself to do this, but most often you only become a true believer with experience. As this happens, you become more committed to a rules-based approach, and that’s when the shift occurs.

Don’t expect to remove your emotions

Some traders assume that trading successfully means completely conquering your greed and fear emotions. Forget it. When that day comes, it means you won’t have any emotions at all . . . definitely not a good thing. Eliminating emotions when trading is not a reasonable goal; however, managing them is.

Things that can elevate emotions include the following:

  • Trading using a discretionary approach

  • Making trading decisions when the markets are open

  • Using an underlying stock or sector that “owes” you on a trade due to previous losses

Here are ways to address these specific items:

  • Focus on more systematic approaches.

  • Identify an after-hours time for trade review and management.

  • Step away from a specific stock or sector, even if you typically trade with it successfully.

Take a deep breath once in a while. Buy yourself some time if things aren’t going as you’d like. There are even times when stepping away from trading for a period of time is the best way to adjust your attitude and approaches.

Monitoring your emotions is the first step to managing them. Consider adding a note to your trade-management sheets to track your emotions. Also note your emotions during off-market hours . . . if you wake up cranky or even worse, can’t get to sleep at night, your emotions are managing you.

Don’t suffer from analysis paralysis

If you like playing around with numbers, the economy and financial markets provide you with an endless supply of them. You could probably go years seeking out relationships between different measures, trying to obtain market timing signals. Then you can back test and forward test every existing indicator to see which ones give you the optimal trading signals.

The truth is that sometimes they will work and sometimes they won’t. That’s because even though the data may be sound, the market is, by nature, predictably unpredictable.

Going live will change everything. Just like singers can nail the notes at sound check but sometimes miss during a real performance, paper trading it the whole time won’t necessarily get you any closer to successfully trading. At some point, you need to experience the markets, where you, the human trader, will respond differently in a live trade.

As mentioned, part of trading successfully means managing your emotions, not removing them. There’s another side to that, because you also bring great emotions and traits to the trading table. Confidence becomes so important when the market picture begins to get hazy — it’s what keeps you following your reasonably tested rules.

There is a point of balance. Because the market with all its data can provide some interesting diversions, it can also keep you from the task at hand. After all your learning, reviewing, testing, practicing, and analyzing are done for a strategy, taking it live provides experience that solidifies your understanding of it all.

If it’s your first time trading options, use limited-risk strategies and proper trade sizes to gain that experience. And if all goes well, you’ll also make some money along the way.

Don’t stop learning

No single strategy or analytic technique works every single time. If there was a sure fire strategy that did, everyone would be using it. The changing nature of the markets make it almost impossible to avoid this fact. Because external events such as wars, pandemics, economic conditions, and bullish and bearish phases for the market and international markets never repeat themselves exactly, there’s always the opportunity to learn.

There are a variety of analytical approaches to trading, each with techniques and tools for you to explore. Add to the mix new products, such as ETFs and Bitcoin, which are periodically introduced, and you have your work cut out for you.

There may seem to be a conflicting message here. The goal is not to confuse but to compartmentalize and get you organized. When you are starting out, it’s important to master one or two strategies at a time before moving on. However, as you gain experience, add a manageable number of new strategies to consider and explore. Market conditions will simply dictate it.

It’s helpful to have a game plan regarding continued education . . . especially if you want to stay on good terms with your friends, family, and work colleagues. You need balance in your life. Here are some quick thoughts to help you when creating your continued education plan:

  • When mastering strategies, you’ll find topics you want to understand better. Address those in a focused manner through self-study (including books, audiobooks, and periodicals).

  • Move on to additional analysis forms and strategies through more formal education if needed (live courses online and/or offline, or self-study.

  • Start the year with general topic goals (for example, learn two strategies and more on technical analysis), along with more specific goals (such as find strategies benefiting in sideways trending markets, better understand intermarket analysis).

Most traders naturally continue learning because they gravitate toward books, articles, news programs, and conversations that deal with the markets.