Let’s face it, we all make mistakes.
Whether it is at home or at work, we’re all bound to screw up at some point in time.
However, in most cases, when we make mistakes we tend to study them and figure out a way to not repeat the mistake – essentially, we learn from our mistakes – and on the most part, we do well.
Trading however, is usually a different experience. Many traders will find themselves repeatedly making the same mistakes time and time again.
No matter how many times we say “I will definitely not do THAT again!!!” – a few days, maybe weeks later, guess what happens?
De ja vu anyone?
After this happens we sit their at our desks and ask the “Why did I do that again???”
Simply put, humans and creatures of habit. We tend to repeat the same behaviors over again which have become habitual to us on a subtle level.
1. Failing to cut losers
The number one reason for this is quite simply that we love to be right! Our minds are auto programmed to always seek to be correct, and our egos hate it when we are wrong, and will almost always try to compensate – unfortunately in the trading world this is a big problem and leads to many accounts being destroyed.
If a trader were to take action and cut our losses, they are essentially acknowledging that they were indeed wrong (Note, a losing trade doesn’t necessarily mean you were wrong – more on this later…). This creates a conflict for them, a dilemma, for the reasons mentioned above.
As such, they hold on to our losing trades. We tell ourselves “If I can get this one over the line then I will never do this again”. This is also the point when traders usually find religion, and are hoping and praying to the Lord to give the markets a nudge and help us out.
One issue with trading is that unfortunately bad behavior is at times rewarded. Individuals can trade in an extremely inefficient manner and go completely against their rules and system and sometimes, perhaps even many times, they are rewarded with price bouncing back in their favour, thus allowing them to close at break even or even a small profit.
At the time of this situation unfolding, they feel great, breathe a big sigh of relief that they managed to come away unscathed – ergo their bad behaviour was rewarded, and thus reinforced!
The same situation unfolds a few days later, and once again the trader is undisciplined. They decide to move or even remove their stops, thinking the market will rebound. After some time, when things are not going as they planned, they start hoping and praying. Once again they may get lucky and get out at scratch or a small profit. The negative behaviour is once again reinforced.
The third time however, you know exactly what is going to happen. This time, the market takes the trader to the cleaners. There is no rebound and the trader is watching their loss increase and increase. Then, when the pain becomes unbearable and the trader either has to close out his trade or the loss is too big in proportion to his account, his broker will close it on his behalf.
At this point, the trader becomes sane again. He stares at his trading account, unable to figure out what was going through his head as his account now sits 50% down.
It is a very painful experience, and one that nearly all traders go through at some point. The key here is to a) Be aware of your behaviours and try not to reinforce negative ones, and b) Try not to pay for the same lesson twice!
The elements of good trading are: 1) cutting losses, 2) cutting losses, and 3) cutting losses.
If you can follow these three rules, you may have a chance.”
2. Snatching Profit Early
This particular mistake links in nicely with mistake #1.
As mentioned before, we love to be right, and will fight as hard as we can to not be wrong. As such, like mentioned in mistake #1, our natural instincts are to avoid taking losers. However, this also means we like to take winners early. Why do we do this?
It’s quite simple really. Once we get into a profit – we view that as being ‘right’. We do this because of a fear of losing. We are fearful that our unrealised profit will be handed straight back to the market, that price will reverse and what was once a profitable situation will turn into a loss. As such, we take our money off the table, bank a small profit and feel good about ourselves in the short term.
In the long term however this will do much more harm than good. The big winners pay for the losers and still give you a bit of profit in the bank. You must remember anyone claiming success rates of 90%, 100% etc is lying. Losing is a part of trading just as much as a wheel is part of a car. However, if you are letting you winners run, you will have a much higher chance of success, even with a lower success rate.
The caveat to this point though is to let your winners run in accordance with you trading plan and technical system. You cannot try and run every single trade to 200 pips profit. Occasionally you will get such moves, which is great! However, on many occasions I have seen traders be 60/70/80 pips profit only to watch it all disappear due to greed.
A good self-check question to ask yourself is “what is the technical reason for my action?” – After all, if we class ourselves as technical traders, we need to have technical reasons behind not only our entries, but also our exits right? If there is a technical reason to close your trade, e.g. price is approaching, or at, a significant price level that is likely to show some resistance, then close. However conversely, if for example you are long and price is reaching for a certain price level, don’t snatch at it.
3. Over Analysis and Self Doubt
A common term for this is ‘Analysis Paralysis’.
Analysis Paralysis will happen usually to less experienced traders who do not have a clear and defined trading system in place. When newer traders first get started, usually the mindset is that ‘more is better’. They load their charts up with various different indicators, without fully understanding why they have them on the chart and what exactly they do. It is clear as the trader develops that the opposite is true – ‘less is better!’
As a newbie you may try and learn Price Action Strategies, Harmonic Patterns, Moving Average Crossovers, MACD/RSI Divergence etc etc – the list goes on and on.
All this will do is create a lot of noise and confuse you. E.g. If Price Action is giving you a bullish set up but some indicators are showing overbought, how will you react? Which signal do you prioritise? Will you be confident in your trade? Will you even be able to pull the trigger?
In trading, your main aim is to pick one thing, and learn to do that one thing very well – become that one trick pony. It may seem boring, it may not give you the volume of trades you want, but you will be a lot more successful and efficient by mastering one strategy as opposed to being a jack of all trades.
4. Trading Out of Boredom
We’ve all done this right? Even experienced traders have gone through this at one point in their trading career. It is vitally important that you can realise when there is a risk of this occurring so you can prevent it from happening.
Everyone who gets into trading wants to be consistently profitable. To accomplish this, you need to create a trading plan for yourself that will give you a consistent set of actions to follow. It will be your instruction manual on how you will navigate the markets on a daily basis, and it will cover your entry criteria, exit criteria, trade sizing, risk management protocols etc.
Once you have a written plan in place, you follow it. You must understand that by veering away from the plan, it will just generate feelings of frustration, confusion and be emotionally draining – this will only result in one thing – being a consistent loser.
Try and find one trading approach that works for you, create a plan around that trading approach and stick with it – this will give you an infinitely better chance of making progress in your trading career.
5. Becoming Emotional Over The Outcome of a Trade
Usually, newer traders are highly attached to their trades. They go through peaks and troughs emotionally, and all is dependent on the outcome of their trades.
They are hyped up during or after a winning experience, and equally almost in a depressed state when they suffer a loss.
The problem with becoming attached to an outcome, is that the next actions you take in the market will highly likely be influenced by the emotions you hold from the outcome of the previous trade. In other words, if you have a big winner, then your emotions will be peaked. You will undoubtedly feel on top of the world, and start to think that trading is easy, that you have ‘cracked it’, and that you can do no wrong. This is a dangerous time, as it is possible that you will start taking trades away from your strategy and potentially even over leveraging in your trades.
Conversely, if you feel down, annoyed or angry that you just had a loser and you let your emotions control you, at best, you will only hesitate on your next trade. At worse, you will go on a spiral of ‘revenge trading’ that will ultimately wipe out your account.
You need to understand that losing is part of the game. You cannot escape this fact. Understand that losing is simply a cost of business. If you own a restaurant, before you can serve delicious food for a high price to customers, you need to first buy the ingredients. Think of losing trades as you buying the ingredients, and your winning trades as a delicious dish that you sell on at a premium.
Finally, you need to be able to distinguish between ‘good’ and ‘bad’ trades. If you can understand this it will go a long way into managing your emotional swings after outcomes of trades.
First, understand that a good trade does not necessarily mean a winning trade, and a bad trade does not always constitute a losing trade. As mentioned in mistake #1, sometimes we are rewarded for our bad habits, however even if we are profitable, we could still have violated our system.
A GOOD trade is quite simply a trade where you have executed your plan, regardless of the outcome.
Similarly, a BAD trade is a trade where you have gone against your trading plan, again, regardless of the outcome.
You must remember, that trading is a long term game. Probability dictates that if you have an edge, you may be 70% profitable over the long term. However, in the short term there is nothing stopping you from getting a run of losers.
It is critical that you stay disciplined, follow your strategy and let the probabilities play out.
If you want to be successful in trading, it is rarely big shifts that will do it. Usually, it is the sum of many good little habits, that when combined give you a solid foundation to go on and do well. If a tennis player has the best forehand in the world, but a questionable backhand, serve and fitness, how will he compare against a player who still has a very good forehand (though not quite as good as the former), but also a good backhand, serve and fitness levels? Who will win that match? The former may get lucky and win on occasion, however probability dictates that the latter will win more often than not.
Be sensible, and stay in the game!
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God bless, and happy trading!