Average Investors and Traders Fail for These 3 Reasons (How Not to Be Average) Think back to the last great investment or trade you made. Feels good, right? In hindsight, the idea probably seems obvious. But on a consistent basis, you're probably left wondering why you can't reproduce those results to keep your winning trade streak alive. The chances are that you fall into one of the three pitfalls that cause most investors and traders to fail: You lack an appropriate strategy. You take too much risk. You invest and trade on emotion. You can think of these as the deadly sins of finance, and so long as you know them and watch out for them, you can make sure they don't rule your decision-making process. Today, I want to dig into why most people fall prey to these patterns and, more importantly, how to combat them. RECOMMENDED LINK This 60-Second Trade Makes Instant Cash Hit Your Account… Every Single Time My name is Keith Kaplan. Since 2004, I've been building sophisticated computer software with a single goal in mind: make money. But after years of helping my Fortune 500 clients get rich, I was burnt out. So I quit, and applied my engineering skills to a specific corner of the stock market… where you could potentially generate instant cash every time you trade. I filmed a short video "demo" for folks who are interested in learning how this trade works. Click here to watch it now You Lack an Appropriate Strategy Markets are more volatile than ever, but investors aren't changing with the times. The broad approach of buying and holding forever should be removed as a mantra in the investing world. We've seen years of gains wiped out by the dot-com bubble, housing crisis, and pandemic. Plus, technology and society continue to change at a breakneck pace. For traders, intraday market volatility has turned up to an 11 on a scale of 1-10. Back in 2019, you could use a 1% trailing stop loss on a stock and see it tripped maybe once a month. Now, you could see the stock stop out within hours of entering the trade. Regardless of whether you invest or trade, your strategy needs to match the market conditions and adapt as they change. For example, I know a lot of investors are worried about stocks crashing. The excess price volatility certainly doesn't make it easier. So rather than holding on to a stock for dear life, why not try selling covered calls? If there's one thing I know, when price volatility increases, so does the price of options. So, why not use this to your advantage? For traders, we can use the huge price swings to gain better entries for our positions. A better entry not only reduces our potential losses but increases the potential profits. One method to help us improve our entries and exits is to scale into and out of trades. That way you spread out your risk, which is absolutely critical. You Take Too Much Risk Would you say that Tesla Inc. (TSLA) is riskier today than it was in 2018? From a price-movement perspective, it certainly is. Take a look at the following chart. Source: TradeSmith Finance From 2017 through 2019, shares of Tesla didn't move around that much. In fact, TradeSmith Finance calculated the Volatility Quotient (VQ) for Tesla as 29.26% in the first week of January 2018. Today, it's 53.07%. Is that driven by an increase in price? Not exactly. It's driven by an increase in total price movement, which the huge price run contributed to. Whether you're a trader or an investor, you need to understand your risk. And risk is a function of two elements: Price volatility Position size You could actually create an equation that gives you an idea of your total exposure by multiplying the two. Total Exposure = Price Volatility x Position Size Intuitively, this should make sense. As the risk of excess price movement increases, you should decrease your share size, and vice versa. With today's market, you want to decrease your position size to compensate for the increase in volatility. RECOMMENDED LINK Nobel Prize-Winning Discovery Could Lead to RECORD STOCK RETURNS Nobel Prize-winning research has led to the discovery of a 4-digit “Cash Out Code” assigned to every publicly traded stock, ETF, and mutual fund. “Cash Out Codes” show the best time to sell your stock to maximize your potential profits in any market condition. By following “Cash Out Codes,” backtests have shown you could've booked extraordinary returns like these: +3,024% HIVE… +3,713% RIOT… +1,429% MARA… +569% PACB… and so many more. Check the true money-making potential of any stock before you buy it. You Invest and Trade on Emotion I do it. You do it. Everyone does it. We're human. We can't divorce ourselves from our emotions or simply will them away. So what CAN we do? First, recognize when and where emotions creep into the picture. This happens a lot when markets make huge swings and it's exacerbated by commentary from financial pundits, friends, and family. For traders, we see this when we watch a stock rip higher and we feel left out of the trade. While we all experience these moments differently, no one can avoid them. Instead, we need to bring out our second weapon – a trading plan. Yes, the good old-fashioned trading plan. You may downplay this idea, but mark my words, there is nothing better than releasing yourself from the burden of making a decision when emotions run high. A well-crafted trading plan tells you exactly what to do and when. Going back to risk, a trading plan might look at the Volatility Index (VIX), which is based on the implied volatility of S&P 500 Index options, and use various price levels as a gauge of price volatility. So, if the VIX moves above 30, we might want to reduce the positions we initiate by 25% to 50%. Or we can use it as a gauge to identify times when we can sell option spreads to collect higher-than-normal credits. It also means you need to keep an active and updated watchlist at all times. Now, this might sound like a lot of work. But that's the beauty of a trading plan. Once you create a plan, it's easy to maintain. You can devote as little as 30 minutes a week to reviewing and updating your plan. It's a lot like playing poker. You won't see too many hands for big stakes. But when you do, you want to be ready. What are some of the investing and trading mistakes you've made in the past, and what have you learned from them? Email me your stories and let me know what challenges you faced and those you have yet to beat. Enjoy your Friday, Keith Kaplan CEO, TradeSmith P.S. If one of the three pitfalls above has you nodding your head in agreement… Let me share a secret about a unique "code" that reveals the optimal time to sell your stocks to cash out for potential gains, avoid bigger losses, and the right time to get back in for maximum gains. You can unlock the "codes"for every stock you own, or want to own, for a chance at potential returns as high as 1,429%, 3,024%, or even 3,713%. Click here for the full story. Best of TradeSmith The chart below represents the best-performing open positions over the last two years, as recommended by our software. 866.385.2076 | support@tradesmith.com ©TradeSmith, LLC. All Rights Reserved. You may not reproduce, modify, copy, sell, publish, distribute, display or otherwise use any portion of the content without the prior written consent of TradeSmith. TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. 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