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Trading Rule #1

Posted By Barry Ritholtz On June 29, 2005 @ 6:15 am In Trading | Comments Disabled

The first rule of trading is simply this:  When you make a mistake, when you buy or sell ANYTHING by accident, you immediately unwind the position.

Immediately.

There are no ifs or buts. There is no after the trade consideration. (There’s no crying in baseball). Do not justify or attempt to rationalize the position. You reverse the trade the very second you discover it.

Why? Because you own something you never planned to. You did not do the due diligence, the research, the stop loss planning, the carful contemplation.

And, you no longer can. Now, you are an interested party, no longer objective. You have a vested interest, a stake in the outcome.

Here’s a perfect example of what NOT TO DO:

Somebody’s sure to notice this… [1]
Tue Jun 28,10:42 AM ET
http://news.yahoo.com/s/nm/20050628/od_nm/taiwan_shares_dc

A Taiwan stock trader mistakenly bought T$7.9 billion ($251 million) worth of shares with a mis-stroke of her computer, meaning her company is looking at a paper loss of more than $12 million and she is looking for a new job.

The trader with Fubon Securities mis-keyed in a small order from Merrill Lynch Monday, creating confusion when many small firms inexplicably surged the 7 percent trading limit.

"Something like this is difficult to explain to superiors," a Fubon executive said Tuesday. Fubon said that the trader was unfamiliar with new computer systems and would be fired.

"There is a paper loss of more than T$400 million," said the executive.

"However, with a good outlook for stocks in the second half, there are no plans to sell the shares in the near term."  (emphasis added)

These idiots are fucked.


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[1] Somebody’s sure to notice this…: http://news.yahoo.com/s/nm/20050628/od_nm/taiwan_shares_dc

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