How to lose all your money in the stock market

It was the summer of 2007 and I was in Atlanta for some training.  I had $2000 in the forex market.  I just put all $2000 on a single “bet” on a very highly leveraged currency pair.  It went up 100 pips, then 300 pips, it hit 1000 pip profit… before I knew it, my UNREALIZED profits were around $14,000.  The logical voice in my head said “SELL IDIOT!” Right before I pressed the sell button there was this other voice that overpowered my sense of logic.  “It got up this far because you were smart about your trade.  Be smart and hold out just a bit more… it went this far.”  So I waited while I watched the trade retrace… down to the first fibonacci level, then 50% then to the lowest fib.  Now I’m looking at a break even trade.  Then it shows a 100 pip loss and then a gap down… margin call.  My broker pulled a margin call on me which allowed me to hold onto $105 dollars.  Going from a 7000% profit in 1 hour to a 90% loss 30 minutes later is devastating… please take my word on that.

That brings me to my list of “What not to do in the markets.”

1.  Do not bet all your money on one trade – if the market goes against you (probability says this will happen eventually) then you lose all your money.  If you’re spread out over 5-10 trades, you have some room for some error.
2.  Do not trade without a stop loss – Before you enter the trade, know where you want to get out.  Traditional money management techniques say that you should never risk x% of your account.  Technical analysis says use stops to control your risk and put your stops close enough to save you money but far enough away that they are likely to not trigger. 
3.  Do not trade without a take profit target – Before you enter the trade, know where you’re going to take your profits.  This should always be at LEAST 2:1 risk reward ratio. 
4.  Don’t chase a bad trade.  If your trade is going against you it means you were wrong.  Accept it but make sure that you make yourself “wrong” and not “REALLY wrong”.  I tend to think “live to see another day than to die trying today”.  You will not be a martyr in the stock market… you will be a green profit marker in someones account just not yours.
5.  Don’t be emotionally attached to your trades – Don’t play the market with your mortgage money or money you’re afraid to lose.  If you do… you’re going to lose it because you’re too emotionally charged to think correctly.  Use saved up money… you’ll be a lot happier.  Don’t play with your retirement money until you can be completely neutral and are able to make more than you lose.  PRACTICE until you’re good enough.
6.  Don’t try a new strategy with real money – Ever do a Bear Call Spread or a Bull Put Spread?  No?  Paper trade it.  Make sure the trade goes against you and figure out how to unravel it.  Credit spreads (listed) are a great way to make money more than 66% of the time.  The price of your stock can go sideways or in your favor and even a little out of your favor and you can still win the trade.  But if it doesn’t go in your favor… you actually have some insurance to help you.  Learn how to unravel properly.
7.  Don’t search for the holy grail – There is no holy grail of investing… if there was, the guy that had it would hide it with his life.  Play the probabilities… discover a system and mechanically trade it. 

Make trading boring.  Make it methodical and make it as repetitive as possible.  You want excitement?  Go to the casino… you’ll get a better payout then if you try to make financial markets exciting.  Boring will get you money… excitement… well you get the idea.

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