7 Things That Lure Traders to Their Doom

New traders come to trading excited about learning, and looking for a fast path to riches. The majority of new traders can make big mistakes that take their accounts to zero during their learning curve. Traders can grow their capital if they do it correctly, but there are dangers that new traders should be aware of.  I hope this blog post saves you a lot of money if you are a new trader, or refreshes your memory if you find yourself tempted to play big and loose with your trading capital. Here are some of the dangers:

1. Trading too large a position size due to overconfidence of an entry signal. You must limit your trade size to safe levels, and not let faith become your position size metric.
2. Taking positions in markets that are not liquid enough to handle your trade size. You can lose a lot of money fast by getting in and out of a trade with a wide bid/ask spread. The options market in low volume stocks and penny stocks are the worst for this.
3. Holding on to a losing trade and not taking your initial stop loss. Getting caught on the wrong side of a trend can turn a small loss into a big loss. Big losses are the number one cause of unprofitable trading.
4. Adding to a losing trade. This can turn a small loss into a big loss that the ego becomes invested in holding.
5. Thinking that you will get rich quick. The stronger the urge to get rich quick, the greater the odds that a new trader will take the risks that will lead them to ruin. Slow and steady wins the trading race.
6. Being under capitalized.  Trading an account that has not accumulated enough capital can cause a new trader to take too big of a position size, and take too many risks. Profitability will be nearly impossible, as commissions will be too high of a percentage of each trade. Serious active trading requires at least a five figure trading account. The markets will be here when you are ready.
7. Trading markets you do not understand. Trading Forex, futures, or options without a full understanding of how they work, and the risks involved,  is a formula for disaster. You must gain competence in these markets before you will be successful.

Avoid these dangers and stick with what you know. Trading is a marathon and  not a sprint. Make sure you are running in the right direction before you start the race.

Stock Market Success: It is All in Your Mind

No matter the kind of trader, or their level of success, everyone gets up in the morning and puts their pants on one leg at a time. They read the same news, have access to the same strategies, and trade the same stocks. So what makes one trader more successful than another? What gives anyone an advantage in today’s world?

I would argue that the biggest difference between traders is their mindset. Nothing will separate you from the pack faster than having your head in the right place, and it will always give you an advantage over the majority of people who are mentally hanging on for dear life.

To have a winning mindset, you need to focus on four key elements:

• Positive Outlook
• Foundational Relationships
• Stress Management
• Emotional Control

All of these are critical to success, but I will focus on positive outlook in today’s post.

What is a positive outlook? It’s more than just ‘Look on the bright side!’ It’s a frame of mind that puts you incontrol. This is critical, because when you feel overwhelmed or unable to be effective, it is impossible to be positive about much of anything. Here are a few ways that you can take control of your own positive outlook.

1. Start each day by thinking about your strengths. What are you good at? Are you a wizard when it comes to chart analysis? Do you have a keen eye for tech start-ups? Overcome frustration by spending time thinking about what sets you apart from everyone else.
2. Don’t just set goals, reward yourself for achieving them. Steve is big on following a trading plan, and so am I. But don’t take it for granted that your mind will automatically follow the rules. For some people, following a plan is easy, but for others, it is a daily struggle. If you find yourself getting annoyed when you have a strategic misstep, make a mental note to reward yourself when you do successfully follow your plan.
3. Be aware of your feelings. When you are miserable doing something during the day, make note of it. When you are happy, make a note of that, too. By observing patterns in your own behavior, you will be able to gravitate more towards the things you enjoy. Maybe your trading time frame needs an adjustment, or you need to find a better support system.
4. At the end of the day, take time to reflect on the day’s events. Slowly, and without judgement, play through what happened during the day. Find something negative that you think you could turn into something positive and make a mental note of that.
5. And finally, practice relaxing. I say practice, because for most of us, this does require some work. It’s difficult to unplug, breathe, and clear your mind. I once had a meditation client who, when told that I recommended a ten minute meditation session every night, he exclaimed, “Ten minutes!! Who has that kind of time?!” It doesn’t have to be meditation; it can be reading a book, petting a cat, or anything else that lowers your heart rate and brings you joy.

By cultivating a positive outlook, you will inevitably draw positive things into your life, and increase your odds of success. You will attract the best people and be presented with great opportunities. Positivity attracts positivity, and negativity attracts negativity. Which will you choose?

These 4 Questions Will Keep You From Making Trading Mistakes

Often, as traders we have periods where everything seems to go well and we have one winning trade after another. And then, there are these times when nothing seems to work and you give back all your profits, and then some. Or how often has one bad trade wiped out all your previous gains? Often, these periods of ‘bad luck’ could have been avoided by asking the right questions about your own trading and risk management.

In the following article we give you 4 questions that you should always ask yourself when your trading seems to deviate from the norm.

Are you impeccable?

Question 1: What’s the motive behind increasing your position? Are you really a better trader? Is failing really impossible?

We are starting with one of the biggest amateur mistakes traders make. In winning streaks, traders tend to increase their position size because they believe that their trading strategy is all of sudden unfillable or they believe that their ‘gut’ feeling is telling them what the right thing is to do.

“In a storm, even turkeys can fly.” 

Winning streaks are normal and they will happen to all traders. The worst thing you can do in a winning streak is to increase your position size because sooner or later, you will have a losing trade. Traders who increase their position size will give back an unnecessary large amount of their trading profits when their streak ends.

 

 

Should you be aggressive?

Question 2: Are you playing catch-up? Do you want to get your money back?

The second reason why traders increase their position size is because they just had a few losing trades and they want to get their account back to where it was. Again, trading behavior, especially when it comes to risk and money management, which deviates from the norm is very dangerous.

There are two principles that all traders have to accept and live by to overcome this bias:

1) You cannot force winning trades.

2) The distribution between winning and losing trades is random. The outcome of your last trade will provide no information about what is likely to happen next.

Therefore, your risk management should always follow the same principles, even if it means that recovering from a few losses takes a bit longer. In previous articles we said that you do not have to risk the same amount on any trade, but suddenly risking an unusual high amount does not fall into this category.

Frequency of trades 

Question 3: Are your trades justified? Do you really see more signals and valid setups?

Increasing trade frequency is another common mistake that leads to avoidable losses. Traders should carefully observe their trading behavior and ask themselves whether they are really seeing more valid trading opportunities or if they are entering a status of overtrading.

Having a trading plan and a trade checklist can prevent overtrading because you will consciously and actively have to break your trading rules. Even better, print out your trading plan and checklist and put them next to your screen where you can see them at all times.print out your trading plan and checklist and put them next to your screen where you can see them at all times.

Leave your ego at the door

Question 4: Is adding to your position really what you should be doing? Why are you widening your stop loss? What if price does not turn around?

Traders have to be confident in their abilities and about their strategy, but you cannot let your ego get in the way of a trade. Pride and taking losses personally are two traits that do not go well with trading.

Adding to a losing position or widening stop loss orders are two of the most common reasons why traders blow up their accounts with just a few trades. At the same time, they are clear indicators that you can’t accept to be proven wrong and that you personalize losses. If you fail to overcome these negative trading patterns, becoming a profitable trader is impossible.

The 4 Ps to establish a professional trading approach

Preparation

We can’t stress the importance of having a solid trading plan and a trade checklist enough.  If you plan your trades in advance, you are less likely to make impulsive trading decisions or violate your rules.

Purpose

As a trader, nothing should come as a surprise. You plan your trades in advance, you define your risk and the worst-case scenario, you know when to get out, when to take profits and you process all available information. If you find yourself in a situation where you have to deal with the unexpected, something went wrong.

Progress

To overcome negative trading patterns, tracking and analyzing your performance is the only way you can improve as a trader. Most traders make the mistake that they will never look at a trade again after they close their position and, therefore, leave out an important learning effect.

Protection

Protection does not only include having a stop loss in place, but it goes much further. Once in a trade, traders often act like a deer staring into headlights, unable to make rational decisions. Where and when do you lock in profits? Do you move your stop loss order to protect your position? When will you take profits ahead of your target? What are the criteria that will make you close your trade early?

Conclusion

A structured approach and a pre-defined game plan will keep you out of trouble. Trading should be a repetitive profession; each day you follow the same routine, you look for the same setups and just repeat your process over and over again. If you recognize that your behavior and actions deviate from the usual routine, something is going wrong and you have to counteract.

There Is No Perfection In Trading

Markets are full of people looking for what is called a perfect trading system. However the bitter truth is that there is no perfect trading strategy. So stop hoping, and start accepting the fact that you will lose. A perfect trading system is one that makes money in the long run, not a system that makes money with every trade – that is utopia.

Curve Fitting Is Asking For Disaster

If, even after your trading system has proven to be profitable, you still want to improve it, you have to be very careful. A trading system is a very delicate construct and whenever you change a parameter, your win-rate and reward:risk ratio will change. So will your variance, average draw downs, average up draws, and so on.

Changes to a trading system should be subtle and step by step, based on robust data. If you constantly try to perfect your performance, you will eventually end up curve fitting. This means that your strategy will be way too closely aligned to the past which leaves absolutely no room for any changes in market behavior in the future. But as we all know, markets are breathing and constantly evolving.

Fitting a system too tight around past data will cost you a lot of money – the very real dilemma of every back test.

At One Point You Have To Decide Where You Stand As A Trader – And Expect To Lose

You may already have a profitable trading system in your hands, you just don’t know it because after every losing trade you want to adjust so that the loss you just took could have been avoided. However, this means changing your system and opening it up to other potential losses.

At one point you simply have to accept that your trading system will lose trades, it is the nature of trading. In Poker, no one would ever even consider the idea of trying to win every hand he plays; it’s a ridiculous thought and absolutely insane.

“Most traders take a good system and destroy it by trying to make it into a perfect system.” – Robert Prechter

Accept that this is you, that this is your trading system, with all its benefits and flaws. Learn to love it and accept that losses are a part of it. Know that you have a positive expectancy and that the system makes money for you – what more do you want? You are already better than approximately 95% of the people that ever set foot in this business.

You Have To Strive For Excellence, Not Perfection

If you cannot fulfil your dream of creating the perfect trading system, what is left? Excellence! It is your job to make sure to follow your system 100%. Not even the slightest deviation is allowed. Make sure you are always trading at the peak of your performance. Strive for excellence and make every trade count!

Every trade that you take outside of your trading system is an insult to yourself, to the time and effort you put into trading, and to your self-respect.

Excellence really comes down to respecting yourself in the end. Once you come to respect yourself and trust your abilities and your system, it will become easier and easier for you to follow your system.

If you encounter a losing streak, research whether you executed all the trades flawlessly and if yes, did the market conditions change, or did anything else happen? During losing streaks it is essential to stay on course and follow your system, but at the same time understand why you are losing. If there is nothing to be done, good. This describes the process-oriented mindset which we discussed earlier.

Take the losing streak with pride, protect your capital, execute every trade with excellence and you will weather the storm.

Instead Of Optimizing One Setup, Simply Master Another Setup Or Market

It’s fairly simple, really: Once you followed your system for a while (let’s say 50 trades) with the utmost excellence and you are still losing money, you can say with very high certainty that the system is the problem. You can then adjust, but you will never know if your system is a winning or losing one if you don’t follow it in the first place. That’s what demo accounts and back tests are for.

And trust me, the more emphasis you put on thoroughly following your system, the faster you will develop it into a winning system that fits your lifestyle and personality, which is incredibly important.

However, if suddenly you are winning over a sample of 50 trades – wow. This could be it! You may have a winning system. Why change it now? You are making money. Trade the system until you can do it blindly, day in, day out and execute with excellence. If your Edgewonk trading journal tells you that there is a LOT of potential in a certain area – go for it. Test the adjusted system on demo first, of course. However, if you are profitable and can’t find any huge leaks in Edgewonk, leave it as it is. Again, do not curve fit.

If you get bored, that’s great! The hallmark of excellent trading is monotony. You have mastered your setup, congratulations. You can now, in order to smooth your equity curve and diversify your income streams, develop another setup following the same process.

Over time you may learn 3-5 setups to find trades in every market condition and your equity curve will look almost perfect, although there will still be a lot of losers among your winners!

“Multiple systems, traded over a wide variety of markets are necessary to smooth out the equity curve.”  Joe DiNapoli

Conclusion: Never Change A Running System

What definitely holds true in the world of bits and bytes also holds true in the world of trading. Once you make it, be happy with it. Do not question your system, ever, unless you consistently start losing money. Curiosity killed the cat.

With Edgewonk it is very easy for you to test alternative strategies, see where you are leaking money, find out in which areas to improve, and so on. It will also help you tremendously in executing your trades with excellence and building discipline with the immediate response features, such as the Tilt-meter.

Edgewonk, if you manage to follow your plan, will help you to turn a losing system into a winning system and it will help you keep a winning system just the way it is – winning. Don’t be greedy, don’t be a perfectionist. Be an excellent trader that knows that losing is part of the game.

Trade Like a Boy Scout

The Boy Scouts have been instrumental in the personal growth of millions of young people in the United States. One of the reasons for their success is that they stand for something, and they faithfully practice what they believe. We all know “Always be prepared”, and that’s surely good advice. But they also follow something they call the Boy Scout Law. This law focuses on always doing your best, for yourself and others. This got me thinking that there is a lot we can learn from the Boy Scout Law, in all walks of life. Even trading.

A Scout is:

• Trustworthy
• Loyal
• Helpful
• Friendly
• Courteous
• Kind
• Obedient
• Cheerful
• Thrifty
• Brave
• Clean
• Reverent

Let’s translate this to trading:

A Trader is:

• Trustworthy- Be honest with yourself and those closest to you. Trading is difficult, and you will need all the support you can get.
• Loyal- There may be no better trait than loyalty. Surround yourself with those that you respect and who respect you, and defend them to the end.
• Helpful- No matter where you are on your trading journey, there is someone else that knows less than you. Find someone to help with an encouraging word or two.
• Friendly, courteous, and kind- We all have some fun poking at each other here and there, but keep in mind that the markets can hurt, both financially and emotionally. Be respectful of the feelings of others.
• Obedient- Nothing will set you apart from other traders faster than being obedient to your trading plan. Develop a strategy and stick with it, no matter what.
• Cheerful- I think that the more good-natured you are, the more people will be attracted to you, and the more opportunities you will have. There is no place for gloom and doom.
• Thrifty- Being careful with your capital should be of paramount importance to you. Your goal is to have bigger wins and smaller losses.
• Brave- Let’s face it, there are times when you have to go against your natural instincts and be brave. You need to be brave enough to get in, and brave enough to get out.
• Clean- The Boy Scouts are probably talking about scrubbing behind your ears and campsites, but I think that all traders should endeavor to play by the rules and keep it clean.
• Reverent- Having reverence for something is “feeling or showing deep and solemn respect”. We all should have respect for the markets, for the small part we play, and those brave enough to trade them.

There is much to be learned from organizations like the Boy Scouts, but traders can focus on these aspects to give themselves an edge, and increase their chances of having a successful trading career.

What We Do vs. What We Should Do To Improve

In life, and in trading, what is easy and entertaining is usually not what yields the greatest reward. In almost all aspects of our lives, we usually know what we should be doing. But very rarely we do it to the degree that would lead us the results that we want to achieve.

In university, we know that studying a few additional hours would definitely help us get better results. We know that by exercising for only 30 minutes daily, we could get in shape faster. Usually, we don’t do these seemingly beneficial things and we prefer to meet our friends for a some drinks after work, watch the latest episode of Lost or just browse the web for hours.

In trading, the same principles take effect. We know that we should some more time during weekends to write a trading plan and do some market research. We know that keeping a detailed trading journal and studying our past trades would help tremendously. And even though all these things would only take a short amount of time, we still don’t do them.

Why do we like to procrastinate? – Direct reward vs. delayed reward

Watching our beloved TV series, going out with friends or just watching funny clips on the internet is entertaining. After engaging in such  activities, we get an instant reward and a feeling of satisfaction. On the other hand, going to the gym or studying, does not provide an immediate reward – it’s ‘boring’ and it requires active effort.  The positive effects of these ‘tedious’ tasks also take longer to show up and, thus, we initially do not see them as valuable the moment when we make the decision what to do. However, the rewards of the actions that require active self-overcoming largely offset the things we normally do, and we know it.

The same applies to trading. We prefer to read in trading forums to hunt for new trading methods that promise a lot of money fast. Trying a new EA or trading robot is thrilling and you don’t need a lot of expertise to download an EA and get going. Thus, most traders spend their time going after these instant-rewarding activities, that have little benefits for their long-term success as traders. We even suppress the fact that following a disciplined approach, writing a trading plan and keeping a regular trading journal will (almost certainly) help us improve as trades, because we don’t want to put in the ‘effort’ that comes with it.

How to overcome your weaker self?

Unfortunately, there is no easy way out and no secret exists that we can provide that will all of a sudden make all those tedious tasks effortless and enjoyable. You just have to do it. Nike knew it all along.

Check yourself and be honest to yourself:

How long have you been trading? How is your development so far? Do your actions reflect your goals, or are you still following the get rich quick path that has led you to where you are now? Where will you be in 1 or 2 years if you just keep doing what you are doing? The following graphic confronts you with the most common mistakes and areas where traders procrastinate. Although it might seem confrontational at first glance, it is the fastest way to get a clear understanding of your current status and to correct your path.

Why Trading Seems So Damn Hard

Trading can be one of the most frustrating things many people will ever do. It is very counter-intuitive. At times, trends seem to go farther than anyone thought possible, and at other times, the market fails to trend at all. When the market seems to be ready to plunge, it rallies unexpectedly. When a stock or market appears to be going to the moon, it reverses and plunges. A trader’s own emotions can cause their biggest trading errors. Greed for big wins leads to huge losses, and the desire to be proven right causes a trader to hold losing trades longer than they should.

What traders experience:

1. Breakout trades reverse back into the price range and cause a loss.
2. Buying strength and selling weakness short does not work in  a range bound market.
3. Selling resistance short and buying support does not work in a market trend.
4. When the maximum danger of being long is present, that’s is when the best reward is possible.
5. The best winning trades will always seem to be with a small position size, and the biggest losing trades will be positioned too big.
6. Backtesting a great winning trading system won’t guarantee success. The first time you trade it, you may have a losing streak that will test your faith.
7. The market environment will change constantly, making your trading system have winning and losing streaks. This is guaranteed to take you on an emotional roller coaster.
8. Your best trades will seem crazy to the majority.
9. Your can’t miss trade, will be a loser.
10. Your stop loss level that you think can’t be hit, will be reached, and then the market will reverse in your favor when you are out.

The key to getting through this frustration is risk management. If you focus on following a trading plan with discipline, using a profitable trading system, and trading good signals with an edge, you will avoid misguided emotional signals and find profitability.

Why Gazelles Can’t Trade

Gazelles are a an antelope species, and as such, are nimble creatures. They are also susceptible to being easily spooked, and may end up running with the wrong crowd. These traits alone would make them horrible traders, but there are things that a skittish trader can learn from this fleet-footed creatures.

• Being nervous is not a good trading trait. If you are easily spooked, trading is probably not for you.
• Following the mindless herd is a recipe for disaster. Instead, follow your trading plan, no matter what.
• Assume that you are not the apex predator. There is always going to be someone more experienced than you on the other side of the trade.
• Be agile. Know when you should cut your losses and get out.
• Being agile doesn’t mean making knee-jerk decisions. Follow the signals. Period.
• Avoid the tall grass. Don’t get in so far over your head with large position sizing and loose stop losses that you can’t avoid the inevitable.
• Know your area well. Make sure that you fully understand the market you choose to trade.
• Expect the unexpected. There are always unknowns. Make sure you are following the 1% loss of capital rule, and you don’t have to worry about disasters.

There are many traders who are too afraid to dip their toes in the water, and others who may be too brave for their own good. Find a comfortable place psychologically, where you are well educated, but not consumed by your own ego. Only then, will you begin to trade in a good place, and realize your full potential as a trader.

12 Reasons Why Trading is Worth It

Let’s face it. There are a lot of things you can do with your life, and most of them are easier than trading every day, especially in this market environment. But there are real advantages to devoting your time to the science of trading. If given the proper attention and nourishment, a trading career can exceed your expectations and give you a new leash on life. Here are the top twelve reasons why trading beats most other things you could be doing today.

1. You are your own boss. You decide when and why you do what you do. You don’t have to answer to anyone else, and you don’t have to justify your actions.
2. You reap what you sow. Your actions are a direct reflection of your own knowledge. You benefit from your own self-study.
3. Your time is your own. There is nothing more valuable than your own time. Guard it with your life.
4. It never ends. In the long term you will be paid for your hard work and effort in learning the mechanics of trading.
5. You can overcome any emotional self-doubt. You will benefit from the stubbornness of others, instead of being a victim of it.
6. You can finally earn what you are worth!
7. It is a business with no inventory, little overhead, and no employees.
8.  You are in control. You can trade from wherever and whenever you want.
9. No commute.
10. You can work in your pajamas.
11. Your destiny is in your own hands.
12. It is the greatest game on earth, and you are paid to play.