20 common trading mistakes and how to fix them – Part 2
Our adventure continues!
Discover, five new common mistakes that most traders make in this article.
Above all, discover one of our little secrets that makes all the difference.
And if you missed it, here’s the first article with the first 5 common trading errors!
The trading mistake
Inconsistent traders are constantly searching for new entry rules, the latest whiz-bang indicator or fad and any new ideas that will supposedly help them trade “better”.
Jumping from one system to the other in the quest of the Holy Grail is a time-consuming, soul-destroying act of futility that involves hours and hours of work and frustration.
Until the trader finally realises that the perfect system doesn’t exist.
Why do people think they constantly need to search for something different?
Many wannabe traders are led to believe that entry signals are way more important than they really are.
As a result, they spend time and energy in a constant search for the perfect entry signal, and continue to complicate the entry process.
Until it becomes simply too complicated to use.
It only leads the trader to “paralysis by analysis”.
Traders become so bogged down with indicators, patterns, strategies and formulas that they are unable to enter trades.
They are waiting for so many of these things to line up perfectly before entering a trade that they never get to actually pull the trigger and enter the trade.
And so this paralysis triggers the need to be right. And if you want to be right, you can’t accept losses.
If you can’t accept any loss, you are not a trader.
The fix: Keep It Simple & Stupid - KISS
Without doubt, the simple things in trading are, more often than not, the best.
The markets are a complex mix of people with a complex mix of strategies that forge together to create a market of buyers and sellers.
Where some see sell signals, others see buy signals and vice versa.
The need to create complicated entry strategies adds further complexity to an already complex environment.
Much of this stems from people’s desire to attempt to control something over which they can have no control.
The only variable in the market we can control is ourselves.
Our fear, greed and emotions, and how we interact with the market and adhere to our trading rules.
Seriously, human beings try to move from pain to pleasure.
The average trader thinks if they optimise something away from the pain of past losses they will move towards profit, so they will create a future of pleasure.
Over-optimisation does not help in the long run.
Having a simple and straightforward approach to trade entry :
- shifts the focus away from the need to be right,
- free up your time to explore other trading techniques and to spend less time poring over charts and analysis techniques,
- result in psychological and physiological benefits.
7. Negating money management rules
The trading mistake
The vast majority of traders, and marketing trading-related business tend to avoid money management like it is the black plague.
Mention money management and people fall into a self-induced coma.
And if you don’t believe it, ask yourself:
- How many hours did you spend looking to optimize entry and exit strategies?
- How many hours did you spend to research position sizing?
Indeed, many traders and investors have little understanding of this concept.
While creating their plan, newbs forget to define the size of their position.
It is estimated that 90 to 95 per cent of all traders fail (blow their account out) within two years.
The very fact that so many traders risk their entire accounts (most don’t realise this is what they are doing) speaks volumes to the importance of money management.
On the flip side, proper money management can literally turn an average performing strategy into a multimillion-dollar machine in a matter of a few short years.
How important is this? Consider the following scenario.
Two traders trade the exact same system over the course of four years. The first three years are great.The fourth year the system falls apart and gives back a great deal of the gains achieved during the first three years.
The trader applying a proper money management strategy would geometrically grow their account during the three good years and then protect those profits when the drawdown comes.
The trader who does not is not efficient during the three profitable years, and ends up giving most profits back in the fourth year.
The net result could be hundreds of thousands of dollars between the two traders.
The fix: Define strict rules.
Money management is simply determining how much of your capital you are going to risk on each trade.
This is done not only by determining the trade size, but also determining exactly when you will add/reduce your position.
There really are only a few basic money management philosophies.
Knowing exactly “how many” you will buy or sell when your trade entry triggers are confirmed shifts you to a new level of professional money and trade management.
You will no longer be guessing and exposing yourself to positions sizes that are either too large or too small for your account size.
You will also be able to clearly define when to increase and decrease your position sizes in line with your total equity.
For example, if you start with one, when will you increase to two, or three, and so on?
If you increase to two, three, four or whatever, what must happen for you to decrease back down to three, two and even one if circumstances warrant?
These things should be determined prior to trading so that the trader knows what the ramifications are at each increase/decrease level.
Generally, changes in trade size should be based on changes in equity and/or risks being taken.
We give you a little SECRET that will make a BIG difference
This paragraph has its own title because it’s probably the most underrated and powerful tool for a trader.
It goes well further than what you think.
- The classic: Don’t risk more than 1 or 2% of your equity on a single trade.
- If you lose 6% of your total equity in a month, step out of the market for a moment and analyse.
- Always know where you stand for your margin requirement.
- Define when you add to a winner. Yes, we add more to winners, not to loser… For example, after the trade brings you 1R, move your stop at breakeven and add on a new breakout.
- Distinguish between your profits and your equity over a period of time.
- Define a period of time to return your profits back into your equity: At the Subverto Club, we consider our equity on the first day of the month. All the money generated during the month is considered as profits.
- Define a percentage of your monthly profits that you can add to your 2% equity risk per trade. So your risk won’t be 2% of equity, but 2% of equity + 5% of profits.
Well, that’s our little secret that will create a big difference…
Why ? Let’s take an example.
Let’s assume this trader made 10k profits after 2 weeks of trading, with an equity of 100k:
- If he opens new trades only using 1% of full equity, his risk per trade will be… 1100 usd because his equity is 110k.
- If he opens new trades using our little secret, his risk per trade will be… 1% of 100k usd = 1k usd, and you add 5% of 10k so 500 usd. So his risk per trade becomes 1500 usd.
Please, imagine the difference over the long term that’s such a tiny difference in position sizing on a 110k usd trader can create…
This is truely HOW you reach BIG goals in trading.
Well that’s it for now.
We will give you more of these secrets later.
8. Failing to understand that losing is the new winning
The trading mistake
Early in life we are taught to believe that losing is bad, and that to be successful we must be a winner.
This conditioning applies throughout school, business, sport and even the social environments in which we participate.
We are constantly encouraged to compete to win, and winners are praised for their achievements.
Losing is treated with disdain and we suffer the negative emotions of anger, disappointment and frustration when we lose.
We think we have failed when we lose and we worry that society and our peers will judge us as losers.
These negative emotional reactions to losing trades create frustrations and can cause the unwary or uneducated trader to begin erratic, unwarranted and subjective decision making which creates more disappointment, poor results and dwindling capital.
The fix: Develop yourself to think in probabilities.
Accepting that trading is as much about losing as it is about winning is a dramatic leap forward for any trader.
This is a sure sign that a degree of professionalism has been achieved.
So how can you accept losing?
Accepting losing trades and being able to deal with the loss in a clinical and businesslike fashion is achieved through:
- personal development
- losing small, which means, risking small and only adding to winners.
- And also through a complete understanding of the range of probabilities and outcomes of the system being traded or the approach being used to engage the market.
First, losing requires personal development.
To reach a state of acceptance, we must first come to the realisation that, despite all our conditioning and contrary to other areas of our lives, losing is actually okay in a trading.
You need to develop empathy with your losses.
Empathy will move your focus from being right and measuring each trade as a winner or a loser to accepting the outcome of each trade regardless of the result.
Empathy with your losses will slowly build your mindset with thinking with probability.
Secondly, losing requires you to understand the mathematical expectation of your trading system.
Mathematical expectation refers to expectancy.
It is what you expect to win or lose, on average, for each trade over a large sample of trades.
It is essentially a benchmark number that tells you whether you have an edge or not.
If your expectancy is a positive number, then you will achieve a positive outcome if you trade according to the system’s rules, which are based on the probability of winning and on the size of the winnings compared to the size of the losses.
Your losses will build your confidence in your ability and in your system.
9. Using leverage also leveraging your emotions
The trading mistake
The major benefit of using leverage and/or trading on margin is the increased purchasing power of the trader’s available capital.
Relatively small amounts of capital can be used to have access to much larger position sizes than would be available to traders if they were to use only the capital or funds they had available.
Trading using the margins available from the CFD providers for example has enabled many people to begin trading using very small amounts of start-up capital.
They have then leveraged up these accounts while not fully understanding the consequences of their actions, and have suffered accordingly when the market has moved against them.
Well, i am not going to give you a detailed example but, i just want to emphasize on:
- If the trade moves in your favor, you will win more money.
- If the trade moves against you, you will lose more money.
- You feel euphoric making more money
- You feel terrible losing more money.
So on one hand it allows us to generate a larger percentage returns on our available capital.
But on the other hand, it can also magnify losses and add a larger element of risk for traders who don’t fully understand or comprehend the ramifications of trading using margin.
And as a result, as it increases your “power”, the wannabe trader has a tendency to… oversize and overleverage.
That ALWAYS ends bad. Because using leverage also leverages your emotions.
There are countless examples of traders using much higher levels of margin or leverage that have resulted in them completely wiping out their trading accounts.
Without totally wiping an account, leverage leads to more emotions. And emotions lead to bad decisions.
So… leverage is a double-edged sword !
Many inexperienced, undercapitalised and underprepared CFD traders have no doubt felt the wrath of the markets when they have been overexposed to adverse market movements.
Two solutions, very straight forward:
- If you are a beginner, don’t use leverage until you have proven to yourself that you can control your emotions.
- If you are not a beginner, use it wisely.
Using leverage or margin in trading requires a thorough understanding of both the positive and negative consequences that gearing can create.
Ignoring it is not an option, nor is believing that the negative outcomes will not happen to you.
It is vitally important to thoroughly understand the implications of using any level of gearing in your trading business.
Properly understood and used, gearing can and will substantially increase the returns available to traders and investors.
Gearing up a robust and profitable trading system or strategy has the potential to make great results become outstanding.
Gearing up a poorly performing system or trading strategy will only serve to wipe it (and you) out quicker than if it were not geared.Use it wisely and it will be your friend.
Use it unwisely and it will be your worst enemy.
10. Confusing timeframes
The trading mistake
Often, beginners will enter a medium-term trade based on the rules of their trading system.
They will then receive an entry signal for a short-term trade in the same market.
This may be in the same or opposite direction to the original medium-term trade.
The short-term trade does well and they exit with a profit.
They then become confused with the medium-term trade and, because it is suffering a short-term move against them, they will then exit that position at a loss…
Only to then watch as the trade does as they had anticipated but without them involved in the trade and the subsequent profit.
There are 3 steps to this mistake:
- First step: you need to identity your profile,
- Second step: you have to follow your system on each timeframe without getting confused by shorter-term move against you.
- Third step: You can develop a multi timeframe analysis.
Firstly, you need to identify which type of trader you are and the time frame that will suit you and be your best fit with the market.
Are you a short-term, medium-term or long-term trader?
Are you a mixture of all of these? There is no hard-and-fast definition:
- To the day trader, long-term may be a few days.
- To an investor, short-term may be a few weeks.
So it’s relative to one.
Secondly, you have to understand that a trade entered based on the rules for a medium-term hold period must be exited according to the rules of that timeframe.
Yes, you can if you want play short term play, or optimize an entry/exit using a lower timeframe.
- don’t get confused with the rules for a short-term trade entered in the same market.
- be sure to optimize your medium-term entry/exit using lower timeframe, once and only once your signal to enter/exit exists on your medium-term timeframe.
In other words, it is vital that you stick strictly to the rules of each trading system, and not mix up the entry or the exit rules.
Finally, learn multi-timeframe analysis.
It requires that the appropriate skills and levels of confidence to do this have been developed.
In this way it is possible to hold some trades open for longer periods, while at the same time having shorter time frame trades occurring, these may even contradict each other in terms of the direction of the trade.
To do this requires skills to study the market and identify your trading opportunities across varying time frames.
In this way it is possible to be short based on medium- or long-term conditions and set-ups while at the same time being long based on short-term conditions and set-ups.
Looking at a different time frame is like looking at a piece of art:
- If you stand very close you will see things that you won’t see if you stand further away but you miss the whole picture.
- If you stand close you may see dots and spots of paint.
- If you stand far enough away you will see a bigger picture.
Begin with one strategy initially and then move into trading varying time frames once you have developed the skills and confidence necessary to be able to operate two or more trading strategies simultaneously.
The mindset required is one of mental strength, knowledge and conviction.
You must be 100 per cent clear on the rules of each strategy and act only according to these rules, without confusing the rules for each trade.
To be continued...
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