Two Deadly Impediments to Successful Trading
It’s not unusual for find traders who are well versed in the technical aspects of trading. But there is another component to trading that is seldom talked about and given short shrift. Yet, in my opinion, it is the only component of trading that separates successful traders and unsuccessful traders. Let’s face it, learning a trading system is not exactly a difficult task to achieve. Most systems are similar in nature, as each system is looking for potential break outs and break downs for the trader to take advantage of in his/her trading.
Of course, the secret is distinguishing which break out or break down is a difficult, and discerning which trades are just feints in one direction and destined to resume their movement in a contrary direction than the trader plans is frustrating. Oddly enough, I have written several articles about the psychological aspects of trading, and they are the least read articles I write. While some articles get thousands of views, articles on psychological aspects of trading are glossed over.
And that is not as it should be.
Learning a trading system is relatively easy, as it is mostly memorization and rote learning. On the other hand, learning to implement a trading system is a difficult and arduous task. In other words, learning to control your emotions while trading is no simile matter. To take it step further, it is my belief that controlling your emotions while trading is the single most difficult task to accomplish when trading.
Oddly enough, when I speak with traders and bring up the topic of psychological aspects of trading the response is almost universal, traders usually comment “oh, I don’t have any problem with that stuff.” The statistics, on the other hand, bear out a much different story. More than 70% of traders fail within the first three months of trading. Something is clearly wrong.
I am going to break down two very important mistakes novice traders commit, and subsequently sabotage their success. The first is over trading, and the second is trading with no stops, or moving their stops to accommodate a trade gone south.
Lets start with over trading, as this phenomena seems to be the most common malady I see in traders. To be blunt, there are not that many legitimate set-ups throughout the course of the day to support the notion that you can make 10+ trades a day and be successful. There are many set-ups that “at face value” look like good trades, but careful examination of the trade will show the trade is extrinsically flawed, and should be avoided. Yet I observe trader after trader charge into these ill-advised trade in hopes of making that one great trade. To be sure, that one great trade does not occur very often, maybe once a week, so it is futile to set your sight on capturing a whopper trade. I am a singles hitter, and if I can capture 3 points on a given trade, I am ecstatic. But in order to capture three points, I require all of my indicator to point in the right direction.
If I find one of my indicators diverging from the direction of the trade I am considering, I automatically exclude that trade from consideration. Further, I am categorically averse to taking counter trend trades. Which is not to say I never take a counter trend trade, but I have to be absolutely convinced that the trade is a quality trade. In summary, over trading in the ruination of many traders, and most traders would be well advised to concentrate on trading only high quality trades, those with a high probability of success. Specifically, high quality trades usually occur when a trader trades with the trend.
There is absolutely no excuse for a trader to initiate a trade without having preset stops in place. No stops is financial suicide. If you pick a trade and it heads in the wrong direction it is imperative to exit the trade and find a more profitable trade in which to participate. Often times I see traders end up on the wrong side of a trade and then move their stops lower in hoping their trade will make a miraculous comeback. While trades can come back, it is highly unusual. The reason we set stops is to limit losses, and by expanding you stops you are, in essence, increasing your losses. In short, there is little reason to expanded your stop-loss limits. If you have made a bad trade, take you lumps and move on to a better trade set-up.
Of course, as traders our mind set is to trade. After all, you can’t make money if you don’t trade. However, the secret is to be in the right trade. Your emotions will often divorce your intellect from the realities of the market and you will find yourself in positions that can be disastrous. Check your emotions and ego at the door and simply trade the chart in front on you, free from emotion, and deal with the reality of the chart in front of you. Hoping for a trade to work out is a bad investment strategy, pick the trades with the highest probability of success and profit.
