Trading habits are the most difficult tasks for traders and investors to overcome, but it is the most important lesson to master. The majority of the retail investors failed to achieve consistent profit or retain their investment profit because of the bad habits the below:
#1 Following buy calls
There are thousands of listed companies in the market, most traders & investors will give up looking for stocks in the list due to the numbers. Is too much work for us who have day jobs and family to spend time going through all of the stocks.
Therefore, investors & traders will look for the easiest way to find the “right” stock. News, analyst reports, so-called “TIPS”, & stock tips by unconventional channels such as Telegram or Whatsapp becomes the easiest channel to know which stock to invest or trade.
However, you will find that the sharing from these channels are not reliable. But there’s no other platform for us to find stocks for a good trade & investment. That’s why retail investors have no choice but to follow these channels even though they know that it is not very helpful to their investment or trade.
Why are the stocks shared from these channels not consistent & not reliable?
We can’t say that it is not reliable, the analysis or the publication of the stocks are merely telling us what is happening in the market. It is not a prediction or estimation for our investment. Often, traditional analysis is just a tool to tell us what is the current trend, but not so much about telling us where it is heading to.
Investors or traders shouldn’t comment on these channels that are not reliable, because they are just sharing what is HAPPENING at that time. Shouldn’t use these as a form of forecast or prediction of the price direction.
This stock showed a price & volume surged on 3rd September but the news covered the price surge on 6th September (as shown below in Google search).
The reason for the sudden price surge was not due to any corporate action. Furthermore, the company posted a fourth-quarter loss and a fall in revenue at the time of the price surge.
We can further prove our belief from this case study. The stock price performance has no direct influence by its fundamentals of it.
Explained why a company financial health has no direct relationship with the stock price:
From our experience, we should analyse and make sure the price of those stocks that are shared in the news, reports, & “tips”, are not at the high side. We should stay away from these stocks to avoid getting trapped at the high side.
#2 Difficulty in Managing My Position
The profits from our trades & investment are often not able to cover the losses. This is because we are easily satisfied or fear our profit will turn into losses if we don’t take it now. When losses occur, we tend to hold on to losses and are not willing to face the reality of losses and continue to hope for the price to move higher. While comforting yourself with the small profits we made.
The common cut loss method that we learn from any textbook or course is always following a systematic method. Setting a fixed percentage of cut loss based on our own position. Then we find the price reaches our cut loss point easily and we start adjusting our cut loss point to a lower level, which will incur more losses and the return we have from other trades are not able to cover the lower cut loss point. With a lower cut loss point, we felt too painful to cut loss, then we gave up on cutting losses.
The above will continue to repeat again & again until you give up investing in the stock market. The above steps to cut loss and entry seems very common. But it is the biggest mistake in trading or investment. If you notice, selecting stocks to cut loss or take profit is always based on our own expectations, based on what we think and what we want. When we are investing or trading in the stock market, we need to understand that the price movement of the stock market is not controlled by us. Therefore, we can’t set our cut loss or entry or take profit based on our own expectations. That explained why the common cut loss points are not working and not flexible enough to apply in our investment strategy.
1 of the important rules in trading or investment, is to understand the big boys' intention by analyzing the price & volume movement and have a set of exit and cut loss rules that follow the market but not our expectation. This will help us to have a different cut loss & maximize our profits, you don’t need to question whether to adjust the cut loss & take profit point for each trade anymore.
#3 Unable to Stay Disciplined
One of the reasons why we can’t stay disciplined in our trade is because we don’t understand the big boys' intentions and we have to base on our expectations. The second reason is that we didn’t expect the potential losses to be more than our tolerance. We continue to chase after more profits and band the cut loss points to give false hope to ourselves that the price will rebound.
We can solve this problem by limiting our losses for each trade by limiting our position sizing within our tolerance limits. This is to indirectly control our fear of losing through entering a lesser position within our tolerance level. Make it easier for us to cut losses.
For a details explanation on how to set your position sizing, follow the link below:
#4 Home Run Profit Over Consistent Profit
With the influence of many success stories sharing how traders and investors can make 100% or even higher returns in the stock market. Most investors in the stock market are always looking for a Home Run in their investment or trading returns, while exposing high risk in a single trade or investment, especially in penny stocks.
It is possible to achieve a home run of 100% in a single stock but not invest the amount you can’t afford to lose. Most successful investors and traders know how to manage their stress before they commit to a trade or investment. They will know how much their emotions can handle with every cent down.
For example, we might think we can afford to lose a total of RM 5,000, but we choose to trade penny stocks because we can buy more and achieve higher profits. Let’s say a penny stock worth 0.20 per share, you will be buying 25,000 units of shares with the worth of RM 5,000.
When the stock price drops 0.01 cents, you will be losing -RM250. You will lose RM1,000 when the stock price drops 0.05 cents, -20% losses from your invested amount.
Most investors & traders will be shocked by these losses because they never expect the price to drop and lose 20% that fast. That’s where we start to worry about our investment decision and seek information that gives us hope that the stock price will rebound. Cut loss will no longer be in our trading plan because it is too painful to cut now.
A good trader or investor will manage their risk in each trade equally. Without exposing too much risk in 1 trade and the losses incurred in every price movement is adjusted to a minimal level. So we won’t feel stressed and make emotional decisions when the price falls.
To solve this problem, we will need to focus on the potential losses in each cent drop, instead of the overall investment value in a trade by calculating our position sizing. This is to tell our mind that the losses in each price drop are expected and within our comfort level. Just like the video link we share at the top of this post.
With the right position sizing and expectation in losses, you can minimize your losses in each trade and maximize your return. Even with a take profit & cut loss ratio of 2 : -1, you can achieve decent returns with a winning rate of 40%.
Once you have mastered the above, then you can start to fine-tune your analysis skill in looking for home run stocks by tracking the big boys' intentions on when they are going to start accumulating shares and when will the big boys start to mark up the price higher.
For more understanding about how big boys operate in the stock market, watch the video in the link below:
We need to understand the true nature of the capital market, we can no longer use the traditional way for our investment. We have to apply the unconventional way or the true way to analyze the big boys' intentions in the stock market.
The conventional way of analysis is well known by many, including the big boys. It became a tool to control the herds (retail investors) to their benefit. The profit & losing cycle will always repeat, the same mistakes that cause us to lose money in the stock market. We need a new mindset and analysis to get ourselves surge out of the cycle.
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Malaysia stock market is a unique market, hence it requires a customized trading approach to tackle & swerve. Many existing traders in Malaysia apply a plug-and-play strategy from the overseas stock market, but it is not necessarily the best strategy to trade in KLSE. This is due to the difference in local and overseas stock market regulation and the size of market participants of institutional funds & retail investors.
“True traders react to the market.” is the backbone of our trading method. Our findings and strategies are developed through years of trading experience and observance of the operating style in Malaysia’s stock market.
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