1. Not Having a Predefined Plan
Before you even start to think about trading you MUST have a trading plan. You wouldn’t start any other business without a business plan and trading is no different. Having a written predefined trading plan will help in many ways, from maintaining your discipline to helping you stick to your trading strategy. The plan will become your rulebook and sets the bedrock for your physical trading and is a circuit breaker for your emotions.
2. Revenge Trading
Patience in trading is the most important lesson and transcends all aspects of your trading life. Once patience is embedded as part of your trading, you will see a payoff allowing you to sit back and wait for the right trading setup. Revenge trading is a consequence of not having a plan or patience and will lead to losses, which in turn leads to scalping or hoping you can gain back your losses. This inevitably just leads to more losses because you have lost all structure, discipline and planning and now just punting.
Having a plan to reset and build in circuit breakers in your trading lifestyle is key. You’ll have a plan for losses which will help you emotionally. We all suffer losses but once your stop loss is hit, don’t chase it. When your daily stop loss is hit, STOP TRADING and walk away! Do not get caught in the gambling mentality and chase your losses. Have a well thought through process, well studied and researched, don’t throw all that hard work away to get a recent loss back. You will never be consistent if you use a loss as a motivational factor for the next trade.
3. Being too Emotional
Trading has a dark side; the portrayal of trading as gambling and a get rich quick scheme. Trading should not be gambling, and you WILL NOT get rich quickly. If you want to gamble for entertainment that’s great but do not mix that with the idea of trading for a living. City traders are not gambling; they are process-driven risk takers that can make good money. Emotion needs to be utilised, if anyone tells you to take emotion out of your trading they do not understand psychology. Trading is tough and extremely emotional, so embrace your emotions by understanding them and then your actions will be driven by that recognition of emotion, not emotion itself.
For example, if you are feeling nervous about a trade, understand that feeling of nervousness and look at why you feel it. Did you trade outside your plan? Perhaps then close the trade. Be rational and add your emotions as information in your overall jigsaw puzzle of trading just like any other piece of information.
4. Lack of Money Management
In the actual mechanics of trading and money/risk management is the most important aspect. The first rule of trading is NOT don’t talk about trading, it is CAPITAL PRESERVATION. Your first aim is to preserve your account, then slowly accumulate. This adds to your confidence and will help you become habitual at winning. The idea you can have triple digit gains each month is totally wrong, a hedge fund manager would give their right arm for 25% per annum, so manage your expectations.
Consistency is key, risk only a small amount of your account, small trade sizes are essential, never change your trade size because you think this trade will be better than another. Trade size is linked to risk. Do not fall into the trap of over trading which will negate your money management, so have overall trading rules and limits.
5. Lack of Journaling
Keeping records is another key to be a successful trader.
Write down as much detail as you can, details such as targets, the exit and entry of each trade, the time, support and resistance levels, daily opening range, market open and close for the day are valid data points. Also, as important, note down how you are feeling, comments, if you stuck to your routine and money/risk management process.
You should save your trading records so that you can go back and analyse the week. Sunday will be the most important day to review, analyse, adjust and plan the week ahead. Remember, you are running a business. Forethought and planning, analysis and adjustments will make it a success, but you need data to work from to grow and learn.
As we have discussed patience is the biggest attribute you’ll learn. Rushing trades and analysis will start you off on the wrong foot. The industry puts pressure on you to trade and whilst this is another topic you should not be in a rush to trade. There is no reason to rush, the market will still be there tomorrow with the same opportunities. The markets are quick and volatile so human nature tries to mirror this and we think that we must be as reactionary, but the reality is quite the opposite.
Think of it as the markets are a fast-flowing river and being on it in a small boat you have to react and move fast, because the river is moving fast, but if you zoom out to overlooking the fast river (the markets) you can take a better view seeing where the river meanders and make controlled decisions.
There is no need to rush, take your time if you miss your opportunity there will always be another one, you ARE NOT missing out. Take a pause before you trade and before you press that button, even if you are trading from the one minute chart, look over the river not reacting from within in it. The pause could be a second or two but have one.
7. Evaporating Profits
We have all heard the phrase “cut your losses and let your winners run”. Well I disagree!! Yes, you need to cut losses and have the flexibility for price or your strategy to give early warnings. You may be wrong and act on them before your stop loss is hit. But be careful with letting your winners run! If I am in good profit, then I take the pips. Sometimes price may give you a warning it may turn around, so take the pips. Some of your trades if you let them run will run to target and even beyond but my advice is to be proactive and accumulate pips. I would rather trade off “cut your losses and bag the pips.”