Trading and Discipline. Small Losses, Big Profits

Learn about the common pitfalls that lead over 75% of individual investors to underperform and discover essential trading principles.

Trading and Discipline. Small Losses, Big Profits

Disclaimer: I am absolutely not a licensed financial advisor. You are fully responsible for the financial decisions you make, and you are strongly encouraged to consult with an appropriate professional prior to any investment or financial decision.

A few key points that you will learn from this post:

  • The Importance of Discipline in Trading and Investing
  • Common Mistakes Among Investors
  • Psychological Aspects of Managing Trades
  • Essential Principles for Successful Trading

The Importance of Discipline in Trading and Investing

Many people have asked me what it means to be a disciplined trader and what it means to be a disciplined investor.

It's a very difficult question. Usually, most people respond with Warren Buffett's famous motto: "Don't put all your eggs in one basket." It seems that Warren Buffett's motto was contradicted by George Soros in 1991 when he said that you can put them in the same basket, but keep an eye on the basket 25 hours out of 24, like the hero Chapayev who wakes up an hour earlier.

Because, after all, we don't have time to monitor all our positions; being disciplined in the stock market is, above all, learning from others' mistakes and adhering to certain rules, whether we believe in them or not, whether we regret applying them the first time, because statistically, if we had applied these rules that many of us know, our entire trading life would have been much more successful.

If you've had an underperforming investor's life, it could have been less underperforming than it was, and if you had a successful investor's life, it could have been much more successful than it was.

I speak from my own experience. There are many simple things that we understand and accept but never follow.

Buy, sell, and regret not having made more, because no one has hanged themselves over a small profit. The essential point in this saying is to buy a stock, sell it—you buy it anyway when you hear about it and when you think it's interesting, you sell it when the profit satisfies you—but the biggest mistake is that when it continues to rise, you buy it again.


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Common Mistakes Among Investors

What happens?

If during a period of a stock's growth you haven't participated in the entire increase, you risk participating in the entire decline. And since stocks don't only go up, this is a bad decision. Obviously, you'll tell me yes, but if I bought Tesla at 200 and sold it at 400, why shouldn't I go in at 800 when it later went up to 5000?

It's true. But everything I'm telling you here are tips obtained from statistics. So try to be better than most investors who, ironically, are losers. If we take the total number of people who invest in the stock market, over 75% of their entire lives, individual investors are losers.

It's true that the market continuously grows year after year, and there should be many more winners than losers. They are wealthy, but some make tens of millions or billions, and others lose tens of thousands. Just because for every person who loses ten thousand, a million people who lose ten thousand amount to ten billion, there's only one person who makes twelve billion and cancels all of them.

So, buy a stock, an index, sell it when the profit satisfies you, but don't try to buy it again if it continues to rise.

Try another product and I'll tell you why. The psychology of regret begins. Why did I sell it? I'm no longer participating in the growth, and so on.


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Psychological Aspects of Managing Trades

What do you do when you have two open positions? On one, you make $500, and on the other, you lose $400. Do you close both? Do you close only the winning position or only the losing position?

Even George Soros taught us that if, in a trade—especially in speculative ones—you have made an amount that satisfies you; for example, if you made $500 and have a position where you lose $450: Close it!

Because in total, you remain with a profit of $50. If you quickly close your gains and hesitate, hesitate, hesitate on your losses, you risk reaching a point where either you no longer have margin money, or you no longer have leverage, or you need money and end up closing the position at a very large loss.

I’m telling you something similar if you are losing. If you bought at 100 and closed a loss at 50, don’t start buying at 49 or 48.

On the other hand, if you bought at 100, it drops to 80, and you close a loss, and then it drops to 60, you have the right to buy it because you believed at 100 that it was going to rise. If things haven't changed radically, why not buy it at 60?

But that's only if you have already closed the first position at a loss. Because if you want to lower the average price, as many do—buy at 100, it drops to 90, and you buy again...

You end up saying, "Yes," but now my average price is 95. Then it drops to 70, and you buy again, saying, "Look, now my average price is 87," or whatever the three simple steps were, and your average price keeps decreasing. You lower your average price, but each dollar down brings you two, three, or four times bigger losses than the initial one if you keep the same position.


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Essential Principles for Successful Trading

It's much healthier than trying to achieve a better average price by closing a losing position, waiting for it to drop by 10%, continuing to fall another 5 or 6%, and then buying again.

Then you'll have the same position, but psychologically you'll think, "Yes, it went from 100 to 80." I have the same position, but between 90 and 80, I didn't participate in the loss. Now, when it goes back to 100, I'm a winner; at 90, I'm already breakeven, and so on.

These aspects and the psychological way in which losing trades are managed alongside winning ones are crucial. We can also talk about those who win and never close their positions, hoping for more and more.

They increase their positions because the stock has risen, and if I've profited from it, I will continue to profit even more. These principles are so important for a successful investment and trading strategy that if everyone followed them, I believe we wouldn't have losers.

But since it's impossible in the stock market to not have losers—especially in the case of derivatives where winners take money from someone else—these principles are often not respected.

I'm going to try to do something much more professional. Namely, to establish 10 essential things that a trader must adhere to when entering the stock market. And here I refer to any kind of products.

You'll say, "Yes, but crypto? it always goes up".

But stocks have also always gone up, always gone up. For 20 years, subprime products have gone up until one day they disappeared. It's normal that Bitcoin doesn't disappear; the technology is very good.

The question is, how many of those who bought at 19,000 have resisted selling Bitcoin when it was at 4,000 a year later? How many? All of you will answer: All the intelligent ones have resisted.

Sometimes it's good to resist, but sometimes it's not good to resist, to hesitate. And this was proven even by Warren Buffett, who during the pandemic sold his entire portfolio of airline companies at a huge loss when they hit historic lows in April 2020.


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But five years later, won't we say how smart Warren Buffett was? It's true, if we look at the price of those companies today, Warren Buffett would have been 100% confident.

And another essential thing. When you sell at a loss, don't forget the biggest advantage. When you sell, you've converted to cash. You have cash again.

But, how can you resist having cash in your account and not making trades here and there?

I believe the most important thing in the stock market is not when you choose to make a trade, but when you manage not to make one. The more days in a year where you haven't used your money and haven't made trades because you don't have to do them daily, the better your performance will be.

Those who are influenced by daily news, my videos, my advice, or those of Cramer or Buffett will apply these tips exactly when they shouldn't, exactly from whom they shouldn't, will make thousands of trades, will enrich the brokers but will either create a smaller profile or lose it.


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