January 09, 2006 at 7:49 am | | Comments 12

Small Mistakes = Small Consequences

One of my favorite trading books is Reminiscences of a Stock Operator by Edwin Lefevre. Based on the trading of the famous Jesse Livermore, Reminiscences is full of trading lessons from cover to cover. Although it was written 83 years ago, it still applies to today’s market. Learning from the successes and failures of one of the all-time great traders is hard to beat.

Among the many lessons embedded in the book, one common theme is that a trader should keep his mistakes small. Livermore developed a “probing” system in which he would enter small positions to monitor their activity before he built up to a full position. This way, if he was wrong, it only cost him a little.

Chapter 10 begins with some great advice:

All stock market mistakes wound you in two tender spots – your pocketbook and your vanity.

This is so true! No trader wants to take a loss. It costs money and diminishes pride to know you were wrong. The mistake of losing money is compounded into a shot to your confidence which is so important to keep intact as a trader.

Lefevre goes on to say:

Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.

I can certainly relate to that. The times when I know I could have gotten out of a bad trade at a better spot but didn’t because of a bad decision is always a shot to my pride. Such a feeling can be very detrimental to subsequent trading results, as the need to “make it back” leads to forced trades and compounded errors.

Make it a point to keep your mistakes small this year. Take small losses – they are easily overcome with winners, and you’ll keep your confidence intact!

Find out how I trade for a living by keeping losses small and locating winning stock picks to overcome them with a 2-week free trial to my stock pick service.

Jeff White
President, The Stock Bandit, Inc.

Related Articles: