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There are some common
mistakes I’ve seen traders make in the area of money management.
First, let’s understand what money management is all about.
Money management overlaps
with risk, trade, business, and personal management, yet it has many
aspects that make it unique, distinctly different from all of the
other areas of management. In this chapter we want to examine some
areas of money management that seem to involve mental quirks leading
to costly mistakes.
Listening to Opinion
Kim has entered a short
position in crude oil after carefully studying as many factors as she
could reasonably include while making her decision to trade. She has
entered the trade because her study of the underlying fundamentals has
her convinced that crude oil prices must soon begin to fall. Then Kim
turns on her television set and begins to watch one of the financial
news stations. An “expert” in crude oil is being interviewed. He
begins to talk about how crude oil inventories are almost certain to
drop this year because oil companies are not doing as much exploration
as they have in previous years. Kim listens intently to what he has to
say and then begins to doubt her decision about the trade she has
entered.
The more she thinks
about it, the more panicky she becomes. She considers abandoning her
position even though she will end up with a loss. The fact that an
“expert” has decided something else completely shakes her confidence.
She exits the trade intraday and takes a $400 loss. Prices have not
come near her protective stop, which was $700 away from her entry. The
market never moves sufficiently far to have taken out her stop. By the
end of the day, her crude oil futures have made a new high, and in the
following days explodes into a genuine bull market. Instead of a
magnificent win, Kim has a loss. The loss is more than money, she has
lost confidence in herself.
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