20 common trading mistakes and how to fix them

20 common trading errors and how to fix them

20 common trading mistakes and how to fix them

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We all make trading mistakes.

If you aspire to become a consistent trader, you have a lot to gain from this four part post (we will post this over the next month).

The mistakes discussed here are the more common mistakes made by traders in general, the world over, regardless of the markets they trade.

And… each mistake is followed by it’s fix so you can apply it to ensure these mistakes need not happen to you. 

If you are a new trader, a lot of what will be covered in this series could help you learn from the mistakes of others rather than making them yourself. 

Those who lack discipline and patience will suffer at the hands of the master of fear and the mistress of greed.

That said. Let’s go.

1. The wannabe trader syndrome:
Successful trading is not a democratic right

The trading mistake

Most traders start out not knowing anything at all.

They have no experience in trading.

The only thing they have is  capital (and sometimes quite a decent amount) and a dream of making money (easy or otherwise) that has been fuelled by an ad they have read promising them quick money.

Don’t be the wannabe trader.

Don’t believe you will be able to trade profitably with a minimum level of learning and education.

Don’t fall for the ill-conceived notion that success and profit will flow effortlessly.

Don’t even think you can switch from business owner, engineer and doctor, to successful trader overnight.

Don’t fall for the trading educators that :

  • have built their business around encouraging all and sundry to participate in the wonderful world of trading where profits are generated while you sleep or go fishing with your mates.
  • paint a picture of trading as an occupation that requires little work or effort, merely a computer and 10 minutes a day to generate wealth beyond the realms of imagination.

The industry itself has created an illusion that success as a trader is our democratic right.

The market is a magical thing:  One minute you can feel like a hero, the next minute a complete loser.

Markets are all mass psychology: fear, hope and greed.

It gives us the opportunity to make or lose a lot of money and play out all of our psychological issues and games in a click of a mouse button.

In simple terms, the market transfers money from the hands of the weak to the hands of the strong.

If you do not understand the market, you put yourself in a position of weakness.

You do not want to be weak in the markets.

What you need to learn is a process of analysis and rules to follow that work in the long run.

This is the role of your market mentor. Having one is very important for the successful development of a profitable trading business.

My first mentor was Beetcoin. He charged me 150 euros a month if my memory is correct.

He taught me his own system, logic, and shared trading calls.

He opened himself up to us and mainly helped to correct negative behavior and develop the right mindset.

The room was kept very small with a selection of just a few students in order to provide the best content and a strong relationship for all of us. 

He does not teach anymore. 

Sorry for your loss. 

The fix: Find a mentor who shares his rules AND his trades

Find a strong trading mentor. The trick is to seek out the “real” ones.

If a market educator is promising amazing returns from a secret “system” that is only available to a select few at a greatly inflated price, run away.

Too much  greed through marketing and overselling the dream is a red flag.

Look for educators who:

  • have years of experience, not those with the latest whiz-bang indicator with promises of easy returns and early retirement for little or no work.
  • have a realistic rate of profitable return over an extended period of time.
  • not only teach you their trading style, but from whom you can learn the necessary skills and mindset to develop your own unique trading style that suits you.

You know:

  • A trainee pilot is given procedures to follow.
  • A trainee surgeon is given the knowledge and support of previous doctors.

Why the hell would trainee traders think they can jump into the market after having read one book or attending one scammy webinar and make a million dollars in about five days?

Look for mentors who share their knowledge, experience and rules which they have a proven track record of.

The real guys will teach and trade at the same time.

Actually, trading in front of people is much harder than trading in your own office.

Firstly, this is a sign they believe in what they do.

Secondly, you can also observe if they follow their own rules.

Your mentor must give you a structured way of dealing with the great unknown of where the market is going and how to make money from it.

2. Take responsibility.

The trading mistake

Just like in life, trading is all about taking responsibility for every single decision you make.

Take responsibility for all your actions, knowing that every decision you make along the way is yours to keep.

Blaming others, the system you’re using or your luck will get you nowhere.

The fix: Know that you are 100% accountable for each click of that mouse.

Traders need to take responsibility and have the awareness to recognize how they created their results.

It’s the only way for you to improve your results.

This requires you to have an analytical mindset.

You also need to be well organized so you can narrow down on the point of failure and successfully deal with it.

3. Plan the trade, trade the plan.

The trading mistake

Without goals and plans to achieve them, you are like a ship that has set sail without a destination.

In other words, markets will always separate:

  • the professional or prepared trader from the unprepared.
  • transfer money and wealth from the unprepared to the prepared. 

During buoyant times when markets are trending up and trading appears an easy way to make money, easy money is made by listening to tips from various sources, trading by gut feelings, and even just haphazardly buying and selling based on news snippets and rumors.

Prices seemed to be in a never-ending upward movement.

Rules are forgotten and traders become slack in applying their rules, if  they have even bothered to create a structured set of rules or approach.

Stoploss and position sizing doesnot exit anymore.

Until… 

It all ends in tears when the tide turns and prices crash, a down-trending bear market begins.

Else the market goes into a long period of sideways consolidation where prices chop around within a range and you lose it all overtrading on margin.

The fix: Write down everything you need to execute

As a trader or investor, the need to have a well-researched and documented plan, or set of rules, for engaging any market is paramount to success.

The need to have rules for trading becomes even more important during “tough” times and periods of uncertainty.

But rules must not be forgotten when overconfidence hits you.

Only fools have no rules.

Think about it, if you were to buy a business, would you buy it without analyzing it and understanding its costs, profit potential, draw downs, worst-case scenarios and working out a plan to market it? 

Trading is no different and should be treated the same way.

Professional traders  follow the plan they had written down, before they start their trading session.

They have been able to do this through running their trading enterprise as a professional business, and predominantly  through the use of a written set of rules for all aspects of their market activities.

They execute the plan without any conjecture or agonising over what to do.

A well defined plan includes:

  1. An entry with one or several scale in trades
  2. An invalidation level, in other words, a stop loss
  3. The number of shares/coins to buy/sell
  4. When to add to a winner
  5. One or several scale out trades

The decisions are made almost clinically as they are taken out of trades on profit targets or stops.

Writing down takes the plan out of your head, and :

  • gives you perspective, focus and guidelines.
  • relieves your mind of the stress of trying to retain all that information and allows more knowledge to come in. A plan preserves you from emotion. 

Defining a trading plan is a hard work but it feels so good when it is complete and you benefit from it…

4. The lack of confidence.

The trading mistake

It is difficult for traders to obey the rules of trading because their own psychology often defeats them.

How many traders are unaware of their inner dialogue: “Somebody else must know more than me!” 

Most people have honed a healthy respect for authority figures.

The consequence of not listening to figures of authority like parents and teachers has lead to suffering in the past.

Even as adults, we would like to believe that some people have the answers.

We have an ingrained belief in expert authority.

We are very likely to trust a broker that we can rely on as a  shortcut for our painful process of learning.

Most people have little time to give, yet have a strong desire to discover a golden cash cow.

It’s just the simpler option to follow someone with perceived expert power.

Self-doubt runs rampant to epidemic proportions in our society.

How can this end well when you combine this assertion with a job that requires one to manage and accept uncertainty. The uncertainty of the direction of price.

The fix: Know your numbers.

Success in any business requires business owners to understand and understand their business, their competitors and the overall business environment.

Those who are consistent achievers, while prepared to listen to the opinions and ideas of others, have the mental strength to implement their own twist on this information.

They are decisive and confidently make appropriate decisions for their business.

For traders, this written trading plan is recognized as a first step to finding consistency.

But many traders still do not plan or write the plan.

So what to do if you do not write or plan enough?

Develop a trading strategy that is as mechanical as possible to avoid the emotional turmoil of the market.

The two main aspects of this trading strategy will be:

  • Developing your own skill base through education and learning before Engaging the market, aka. having a trading system and strict rules
  • Knowing the “numbers” of your system. Hell, how could you be confident in trading a poor system?
  • and developing a level of self-awareness so that you are prepared emotionally and psychologically for the rigors of trading.

By knowing the numbers of your system, we would like to emphasize a strong system.

You can measure it by calculating your  System Quality Number .

It is a concept developed by  Van Tharp here“The System Quality Number (SQN) is not terribly complicated – anyone who has a high school level understanding of statistics can calculate the figure, but …

The implications of the measurement are significant and extensive. The measurement affects your trading system selection, system improvement, trading objectives, returns, drawdowns, risk per trade, total risk exposure, compounding, equity volatility management. . . well, just see the subject areas covered in the section for the full list.

Most Importantly – understanding your trading system’s SQN rating helps you evaluate what kind of position sizing strategies you could, or should, use. It also tells you the types of things you need to avoid.

This will allow you to develop the confidence of yourself and the system you have developed.

This ability to trust yourself and your system will allow you to engage the market and your trading activities with confidence and consistency.

Then, your choice should be taken into account by your decision-making processes, and simply follow the rules.

And here are the results of the two systems we trade at Subverto, and the SQN interpretation to help you read it.

SQN of two Subverto systems
SQN of two Subverto systems

5. Not trading on your strengths

The trading mistake

Many traders try to mimic the trading styles and methods of others, rather than develop the approaches that will work best for them.

The result is underperformance and frustration.

Many of the best baseball hitters and pitchers develop their own styles, and those styles often vary.

The key is to find the markets and methods that work for you , not to find a mythical Holy Grail that will work for everyone.

There are scalpers who trade much shorter times than we do, placing dozens if not hundreds of trades per day in comparison to my average of one or two. 

They watch every tick in the market and monitor the moment-to-moment shifts in the order book.

It takes a phenomenal level of concentration and commitment to sustain that trading.

It also takes an unusual talent: the ability to process large amounts of information quickly.

It is the alignment of talents, skills and interests that allow the scalping to be successful.

Most scalpers would fail to manage the portfolio managers, just as many hedge fund managers would.

You have to know your profile of risk-aversion, your skills and weakness in order to capitalize on them. 

The fix: Align the planets in your favor.

Trading successfully and consistently requires a high level of diligence, application and hard work.

There are literally hundreds if not thousands of hours of work required in learning, understanding and applying the skills-required to be successful.

This includes everything from learning technical analysis through to understanding market dynamics.

And a thorough knowledge and acceptance of who you are and how your personality will have an impact on your trading style and endeavours, and ultimately your success or otherwise as a trader.

Many individual traders and intending traders choose to ignore the fact that trading is a high-performance activity that requires a certain level of natural ability that can be enhanced through skills acquired and developed over time.

Just as in sport, the arts, science and any other activity, some people will simply never make it.

Simply align the planets on your strengths.

Through observing yourself and your behaviour and reactions you will be able to refine and enhance your trading skills and your ability to deal with the huge range of challenges and issues the markets will throw at you.

Developing your ability to reflect on and observe both yourself and your understanding of the markets from a distance is a crucial skill to develop. 

It will allow you a greater insight into your interaction with the market, the way you trade, the time frame you trade and various other aspects of your engagement with the markets.

Once you have acquired the skill, build a complete list of your strengths, and your weaknesses. 

Then, find the solution for your weaknesses, that matches your strengths. 

To be continued...

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Enjoy the report and feel free to comment !

Cheers.

Happy trading. 

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