Several people wrote to me this month about how to respond to a reversing market. Although many mistakes can be made in this kind of situation, most of them can be avoided by following a few basic rules. In this lesson you will learn how to avoid the top 6 mistakes people make when facing a crashing market.
Lesson 1: Mistake #1 : Trading with high volume
The first mistake on our list is about risk and money management. There is much to be said about this topic and we will talk more about it in the future. But for the time being, the idea is simple : don’t invest all your avilable money in the markets.
Why, you ask? Because no signal is 100% solid and markets can crash at any time. Can you imagine what it would feel like to lose all of your savings in just one transaction? Not a pretty picture, right?
The good news is that avoiding this mistake is simple : only invest what you can afford to lose. In other words, never invest all of your capital in trading. Use, instead, a portion of you capital for each trade.
Investing only a part of your capital will give you an easier time to manage drawbacks. More importantly, it will prevent you from panicking and doing stupid things - and to take decisions that will put you in the position of taking a cascade of bad decisions.
Mistake #2 : Trading first, thinking later
Another big trading mistake is not thinking ahead. Before you invest, it is important to take a moment to figure out your strategy: What will you do if the market value increases? And what if the market value takes a hit? What exit options will you have in both the short and the long term? You need to write down these cases, and know from before how you will react to all possible changes. Afterwards, follow your strategy.
So remember this: planning ahead is an important. Never ever invest without having a plan.
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