Undertrading
When Jack Schwarger asked Bruce Kovner in "Market Wizards" what advice he would give novice traders, he said, "undertrade, undertrade, undertrade." Although the adage, "You have to risk money to make money," is true of trading, if you risk too much money and risk significant amounts too often, you will more often than not see losing trades, and end up blowing out. And if you blow out, you won't be able to build up the necessary skills to trade the markets profitably. It's better to manage risk, and limit the number of trades you do make.
Bruce Kovner believed that novice traders traded three to five times too big. "Whatever you think your position ought to be, cut it in half," was his advice. But novice traders are often impatient. They want to make money fast. Behavioral economists Brad Barber and Terrance Odean showed that traders overtrade after a windfall. It's like playing with the "house's money" at a casino. When some traders have a big win, they tend to believe that they have nothing to lose by risking a large amount of capital. In addition, they may think they are on a hot streak and can take advantage of it to make huge profits. Unfortunately, novice traders are likely to face many more losing trades than winning trades, and will end up mounting significant losses if they don't control risk. In order to survive in the long term, it is vital to minimize risk. For example, if you risk only 1-2% on a trade, you can make quite a few losing trades and still continue to learn how to trade. As a novice trader, your goal should be longevity rather than profits. Trading takes time, and the longer you can keep trading, the more likely you will be able to build solid trading skills, skills that will ensure that you end up making huge profits in the future.
Longevity is necessary to learn any skill. For example, if you break your leg during a skiing lesson, you will never learn how to ski. You must be careful to learn to ski slowly and avoid becoming disabled in order to learn how to master the slopes. It's the same with trading. You have to build up skills to learn to master the markets, but if you mount huge losses, you won't be able to survive the learning curve.
As a trader, you must learn the conditions under which you work best. By making small, practice trades, you can develop an intuitive feel for the markets. You can learn what it feels like to win and how you handle losses. You can learn about psychological conditions that are necessary to trade with a mental edge. For example, you might find that you prefer to trade in the middle of the day after you are more alert. Or you may learn that you need extra sleep before you feel alert enough to trade at your best. You may also learn the number of trades you can make per day without feeling stressed out. There are a variety of things you can learn about you and your trading style by making small trades to get a feel for the markets. Don't think you need to be an overnight success. Learning how to trade profitably can take years. Rather than blow out too soon, and feel like a failure, it's better to take your time, hone your skills, and build up your trading ability to the point that you can trade like a seasoned professional.
Bruce Kovner believed that novice traders traded three to five times too big. "Whatever you think your position ought to be, cut it in half," was his advice. But novice traders are often impatient. They want to make money fast. Behavioral economists Brad Barber and Terrance Odean showed that traders overtrade after a windfall. It's like playing with the "house's money" at a casino. When some traders have a big win, they tend to believe that they have nothing to lose by risking a large amount of capital. In addition, they may think they are on a hot streak and can take advantage of it to make huge profits. Unfortunately, novice traders are likely to face many more losing trades than winning trades, and will end up mounting significant losses if they don't control risk. In order to survive in the long term, it is vital to minimize risk. For example, if you risk only 1-2% on a trade, you can make quite a few losing trades and still continue to learn how to trade. As a novice trader, your goal should be longevity rather than profits. Trading takes time, and the longer you can keep trading, the more likely you will be able to build solid trading skills, skills that will ensure that you end up making huge profits in the future.
Longevity is necessary to learn any skill. For example, if you break your leg during a skiing lesson, you will never learn how to ski. You must be careful to learn to ski slowly and avoid becoming disabled in order to learn how to master the slopes. It's the same with trading. You have to build up skills to learn to master the markets, but if you mount huge losses, you won't be able to survive the learning curve.
As a trader, you must learn the conditions under which you work best. By making small, practice trades, you can develop an intuitive feel for the markets. You can learn what it feels like to win and how you handle losses. You can learn about psychological conditions that are necessary to trade with a mental edge. For example, you might find that you prefer to trade in the middle of the day after you are more alert. Or you may learn that you need extra sleep before you feel alert enough to trade at your best. You may also learn the number of trades you can make per day without feeling stressed out. There are a variety of things you can learn about you and your trading style by making small trades to get a feel for the markets. Don't think you need to be an overnight success. Learning how to trade profitably can take years. Rather than blow out too soon, and feel like a failure, it's better to take your time, hone your skills, and build up your trading ability to the point that you can trade like a seasoned professional.
posted by nomadhunter at 8:31 AM
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