A simple hack for better trading decisions

What separates the professional trader from the amateur? It is not that the professionals use better indicators, they don’t have a secret method to time entries or know how to call tops and bottoms perfectly. In fact, the difference between good traders and struggling traders usually comes down to a few, very specific points. The concept that can help improve the trading performance of amateur traders significantly is called “Ask yourself: What would the professional do now?”
Just think about all those trades you KNEW you shouldn’t be in, but you entered anyway. Or, how often did you do something with your trade and deep inside knew that it wasn’t the right thing to do? Most of the time, traders would be much closer to profitable trading if they could just stop making bad trading decisions and repeating mistakes.

Before doing anything, ask yourself…

…what would the professional do? The next time you want to break your trading rules and open a trade early, ask yourself if a trader who consistently makes money would do the same. Or, when you see price approaching your stop loss order, would the professional and winning trader really widen his stop loss and risk taking a much bigger loss instead of just accepting that his trade idea was wrong and it’s time to move on to the next trade?
Traders who start operating in such a mindset question their trading behavior constantly and are able to differentiate between positive and negative trading behavior. It is obvious that a professional trader would often act completely different from you and by consciously questioning your trading decisions, you will be able to avoid many of the common mistakes.

Before making a trading decision, pause and reflect. Ask yourself: What would the professional trader do now? Should I really do what I am about to do? Will it help me become a profitable trader?

The 6 deadly sins of amateur traders

It is not a secret why the majority of traders struggle. After you have acquired a good understanding of how trading mistakes manifest in your trading, you have a greater chance of avoiding them in the first place. The following points describe the 6 greatest error sources for traders:

#1 – Breaking entry rules
It all starts here. Even when following precise entry criteria, traders often enter trades too early and don’t wait for confirmation. Or, they enter trades too late and chase price because they did not trust their method when the signal occurred.

#2 – Violating risk management principles
Taking positions that are way too big is a very common problem among traders. When your position is so big that a loss would have a significant impact on your overall account, you are more likely to make emotionally caused mistakes.

#3 – Bad in-trade decisions
Once in a trade, the problems don’t end. The most common trade management errors are trailing stop loss orders too close behind current price, watching your floating P&L constantly with every tick and randomly moving around your target and stop orders without following a clear plan.

#4 – Exiting without a plan
Trade exits are often neglected and traders don’t understand the importance that trade exits have on their performance. The most costly trade exit mistakes are closing winning trades too early and missing out on potential profits, closing a winner too late and giving back profits or letting a loss run beyond the original stop loss. Trade exits are an important cornerstone of profitable trading. Interfering with exits usually costs traders a lot of money.

#5 – Not learning from mistakes
Be honest to yourself and think about how often you repeat the same trading mistakes over and over again? But why is it that traders don’t learn from past mistakes? Most traders just close their trades and will never look at them ever again. Without a review process in place, improvement is almost impossible. If you are not aware what you did wrong and what caused your loss, how can you expect to become a better trader? Professional traders operate in a growth mindset and they are constantly looking to improve.

#6 – Changing systems
Imagine Paul Tudor Jones, Marty Schwartz or Jesse Livermore and think about their approach to trading. How likely is it that those top traders would jump from system to system week after week, try a new indicator every few days or buy trading robots or EAs that promise making money effortlessly? It is absurd to think that the professional got to where they are by jumping from one system to the other without ever really committing to one thing. Do you still think that you will stumble over the one system that will just work miraculously?

We suggest you write down the phrase “What would the professional do now?” and put it next to your trading desk. The next time you are about the make a trading decision that you think you shouldn’t be making, take a look at the phrase and re-evaluate your action.

How far has breaking the rules and repeating the same old mistakes brought you so far? If you are still not seeing the results in your trading you are after, it is time to take a different approach. No professional trader got to the top by breaking his rules, manipulating his orders or gambling with risk.

Why Bear Markets Steamroll Bulls

Having a bull mindset in a bear market is not profitable. Bear markets have no long term support, they can make lower lows for a long time. Buying pullbacks is not profitable in bear markets because pullbacks turn into downtrends, and old support becomes the new resistance.

1.  Buying dips stops working. Bulls end up getting trapped at higher price levels, unable to profit from rebounds because they are waiting to break even.
2. Momentum entries fail to be profitable. Rallies are usually chances for shareholders at higher prices to sell their shares and short sellers to take new, short positions.
3. Perma-bulls confuse short covering rallies for bounces off a bottom. They are dead cat bounces that will later make lower lows.
4. Perma-bulls stay long into 10% corrections and think the sell-off is over, but end up staying long through the 20% upcoming bear market.
5. The perma-bulls fail to understand that when equities are under distribution, all stocks go down regardless of the underlying business and fundamentals.
6. Stock markets go down when the majority is primarily long and the market runs out of new buyers.
7. 10% corrections and 20% pullbacks into  bull markets are normal; 2012 – 2015 price action is abnormal.
8. All markets can trend in two different directions; you must stay flexible. Perma-bulls only think that stocks will go higher.
9. Margin debt and leverage are great vehicles for creating bubbles, but they have their limits.
10. The central bank can create bubbles, but they can’t sustain them forever.

Advanced Stop Loss Guide

Why you should not trade without a stop loss order

The stop loss order is not only completely misunderstood, but also has a much worse reputation than it should have. Here are only 4 of the many reasons why a stop loss should be valued highly by any trader and a trade should not be entered without one:

1) It helps you to determine position size

After you have identified the stop loss price level for your trade, you can measure the distance between your entry and the stop loss to determine the potential loss and then figure out the position size. It sounds more complicated than it is; take a look at our position size calculator to test it out. Without a stop loss, it’s impossible to determine the accurate position size.

2) It defines the worst-case scenario

The stop loss order makes sure that your trade will be closed when price reaches the level (although events might occur where your stop isn’t filled). Thus, with your stop loss order and the correct position size you can pre-determine how much you are willing to lose on any particular trade. Only risk what you can lose comfortably and there will be no surprises anymore with a stop loss in place.

3) Defining the reward:risk ratio

The reward:risk ratio is the figure that calculates how much you can potentially win on a trade and compare it to the potential loss. But, the risk reward ratio does much more for a trader. As you will learn in the advanced section, the reward:risk ratio helps you understand your performance much better and even allows traders to estimate the expectancy of their methodology before they enter the trade. To sum it up, the reward:risk ratio is among the most powerful trading concepts.

4) Protect your profits

Once a trade has moved in your favor, you can move your stop loss behind current price, to secure unrealized profits. More to that later.

Tips for better stop loss placement

The majority of traders only spends little thoughts about stop loss placement. Usually, traders don’t even have a thought-out plan or concept when it comes to placing stop loss orders, but they just arbitrarily place stop loss orders at random levels.  The following 3 concepts help you improve your stop loss approach:

1) The correct process of placing stops

Most traders have good intentions, but often execute it the wrong way.  It is important that you identify the price level for your stop loss level first. Most traders just think about how big their position should be and then try to find a stop loss price. Why this is wrong, we will investigate in the next point. It’s essential that you stick to the following process:

Additional tip: After identifying your stop loss level, look for the price to place your take profit order at. After knowing where you place your orders, determine the reward:risk ratio. If the reward:risk ratio does not match your criteria, skip the trade and do not try to modify your orders to achieve a better reward:risk ratio. This is a common beginners mistake.

2) Use reasonable price levels

Most traders misunderstand what a stop loss really is. At its core, the price level of your stop loss order is the price where your trade idea is no longer valid. It is O.K and normal if price goes against you on your trade, but at some point, a price movement against your trade makes your trade idea invalid.
Therefore, it is important to use reasonable price levels for your stop loss order. Traders who use random stop loss orders tend to re-enter and revenge trade more often because they still believe that their trade idea is still valid.

3) Don’t personalize losses and stick to your stop!

Realizing a losing trade is normal in trading and it is unavoidable. Most traders know this concept and understand that you just cannot trade with a 100% winrate. BUT! But, when it comes to dealing with losses, traders are particularly bad. When price hits your stop loss, it is not  (necessarily) a sign that you are a bad trader, or that you have done something wrong, but just that your trade idea did not work out.
As a trader you have to make sure that you can come back tomorrow and not lose all your money, or an unnecessarily large amount, on a single trade. For this reason, you have to live by this concept: Don’t personalize losses. If you ever find yourself widening stop loss orders or taking them off completely because you want to give your trade the chance to turn around, think twice and really evaluate your objectives and reasonings.

5 Common mistakes about stop loss orders

By following the previously laid out plan, traders can already make their stop loss placement much more professional. But there are a handful of concepts that can help traders even further improve the way of placing and executing their stop loss orders.

1. The hindsight fallacy – think long-term

Once price hits your stop loss order and moves on, it’s very easy to find reasons if you should have stayed in that trade or whether you should have used a different stop loss approach.
When traders see that their stop was set too far away, they will use a smaller stop on their next trade which will make them more vulnerable to volatility. On the other hand, if traders notice that they should have used wider stop loss order, they will reduce the reward:risk ratio of their system by using larger stop loss orders.
As a trader it is important to think ‘long-term’. Do not make adjustments to your approach on a trade-to-trade basis. Follow your rules, evaluate your data and then try to find ways to improve your trading.

2. The break-even trader

Moving a stop loss to the point of your entry (break even) is a great amateur mistake when done with the wrong intentions. The point of your entry, especially if you trade the obvious moving averages or support & resistance levels, is very evident and the smart traders will know where amateur traders get into their positions and that they move stops to break even. This makes stop hunting very easy. As you can see, brokers do not have to read out their customers’ order information because the average trader makes it too easy and obvious how they execute their trades in the first place.

3. Not using a stop gives you flexibility and avoids stop hunting

The myth that not using a stop loss provides you with some kind of flexibility to react to sudden price moves is one of the worst things common trading knowledge suggests to traders. Not using a stop means that you risk being wiped out in one single trade, or at least lose so much money that it cancels out months of good and consistent trading.  Furthermore, it is impossible to use a sound money and position sizing strategy if you don’t use a stop loss order.

4. Adapt to natural price behavior

The majority of trades doesn’t just take off and run straight into your take profit, but moves back and forth. Whereas trailing a stop behind the current price to protect your position can be a good thing, the way traders execute this concept will ruin every profitable system.
It is therefore important to give your trade room to breathe and not move your stop loss to close to current price. Spend some time observing how price moves back and forth and you will be able to spot the wavelike price behavior. The screenshot below illustrates how in a long-term uptrend, you will get frequent retracements.

5. Volatility and changing stop loss orders

Financial markets are constantly changing, the volatility changes and also how price reacts to certain conditions varies a lot. Traders, on the other hand, use a fixed and always constant approach when it comes to placing stop loss orders. Often, traders, even use the same stop loss approach across different financial instruments or timeframes.
Being a trader means adapting to changing market conditions. By tracking volatility and how price behavior changes over time, you can improve your order placement by adjusting your stop loss approach.
In times of higher volatility, use a wider stop loss and take profit method. In times of low volatility, use smaller orders. Tools to measure volatility and changes are the ATR indicator, Bollinger Bands or the VIX.

How to Embrace Your Fear in Trading: The Trading Intelligentsia Has it Wrong

Most trader's and coaches think of emotion as if it is trading kryptonite. The worst of these emotions is thought to be fear.

If you Google "fear" and "trading" you will see a host of "how to overcome fear in trading" articles. No disrespect to those authors, but they are worthless. Don't read them. Every one of these articles misses the point.

Fear in trading is a good thing. It is an emotion that is telling you something. To a trader it is warning that "something is wrong here. Past experience and pattern recognition is a signal that I need to adapt my strategy." 

Why would you want to overcome this legitimate warning signal? Ignoring your emotion and sticking with the plan is a likely bad move. Rather than overcoming this vital emotion, embrace your fear and investigate why the sirens are going off in your head.

The 3 Step Process Embracing Fear

When fear grips me during a trade, I analyze the situation using a  3 step process:

1. I ask myself why I am scared. I review the setup, patterns, risk parameters, position sizing and market conditions. If something has fundamentally changed in any of these factors, I reassess the trade. 
2. If I can't find anything wrong with the trade, I think back to the last time few times I felt this way. Was there a common theme. Did something significant happen in those trades, or was my fear ultimately misguided?
3. If I still can't come up with anything, I look inward. This is where self actualization comes into play. I try to take a step back and "watch the watcher". Is this emotion based on flawed perceptions? Are there factors outside trading making me feel this way? Am I focusing too much on recent profits and losses rather than the trade? 

If my perceptions are flawed or the fear is based on my own mental anxiety rather than a change in trade conditions, I make no trade adjustment and come up with a plan to work on myself.

After this three stop process, a plan is in place to fix the trade or the trader. By doing so, I end up becoming a better trader. This is accomplished not by overcoming my fear, but by embracing it.

The Trader’s Survival Kit – If You Are Still Not Seeing Progress, This is For You

The question “What does it take to become a better trader?”, is one of the most asked questions we receive on a regular  basis, besides indicator and system questions which is another story… Today, we are going to talk about a few topics and concepts which are essential to trading success and which should be the #1 priority of every trader. The topics and ideas that we are going to share should be used to perform a self-check and evaluate how your mindset, approach and attitude lives up to these points.

Master the basics first – The bottom-up approach

Success  is neither magical nor mysterious. Success is the natural consequence of consistently applying the basic fundamentals.
– Jim Rohn

The problem with traders is that they often get lost in the details and skip the core basics which inevitably leads to unprofitable trading and it is hard, if not impossible, to get back on the right track after you have installed the negative behavioral patterns. Thus, focusing on the essentials and building a solid foundation first is so important that we can’t stress this often enough.
If you want to become a doctor, you have to know your tools and get a good understanding of the human body, before you make diagnoses or have your first surgery. There is no “How can I become a Doctor in 2 weeks” course and traders would be much better off if they understood that shortcuts lead to nowhere and that profitable trading takes a lot of time and effort.
Thus, as a trader you have to identify your most common mistakes and problem areas first and only move on, after you have overcome these problems. If you still don’t have the discipline to wait until all entry rules are present, or you still keep widening your stop loss orders and let losing trades often get out of hand, there is no point in looking for another, “better” method or trying out a different profit taking approach which may give you a few extra points. Unless you haven’t overcome the most basic and essential problems in your trading, there is no reason why you should focus on more advanced trading topics.
Bottom-up means that you identify and tackle your greatest problems first and you address your issues one by one. This way you will not only see the greatest impacts on your trading, but it lays a solid foundation upon which you can build your trading career later.

Realistic expectations and the correct mindset

The vast majority of people start trading because of all the money that could be made. And although being motivated and having great dreams and ambitions is not necessarily bad, it can often lead to the wrong actions. Especially new traders are chasing double digit returns, while burning through a lot of cash at the same time; this is a huge paradox in trading. People can’t and don’t want to accept that making only a few percentage points on a consistent basis is much more desirable than constantly risking a substantial part of their account, trying to land a lucky punch.
We urge you to check your expectations NOW. But don’t just say that you are not after the big money and that you are trading because you like the game, evaluate your actions because they accurately reflect your true mindset. Do you still jump from system to system regularly without seeing any progress, do you still make the typical beginner’s mistakes of widening stop loss orders, taking trades that don’t match your criteria and use too much risk to make up for past losses faster? How serious are you about trading? Do you spend enough time working on your skills? Do you plan your trades ahead and keep a trading journal regularly? These are all questions you have to answer in order to get a clear picture of your expectations and mindset.

Being honest with yourself

This point picks up where we left off. Being honest with yourself is an important character trait of any professional in any field. Without having the ability to honestly look at yourself, progress is impossible and although it can sometimes be a painful revelation, if you are not aware of your flaws, you will keep making the same mistakes without any chance of improvement.

I think self-awareness is probably the most important thing towards being a champion.
– Billie Jean King

In trading, self-delusion is very common and it is often a protection mechanism which shields you from the painful reality of your actual performance and it helps justifying the completely irrational pursuit of trying to find the one trading system that will finally provide the best entry signals and turn you into a successful trader. It is not uncommon that even after spending years and years trading, people still look like complete beginners and they are as far away from becoming a profitable trader as they can possibly be.
To perform a self-check, ask yourself these questions. But, most important, answer them completely honestly because, in the end, no one else cares whether you will become a profitable trader, or just keep lying to yourself about your trading journey:

• Am I still losing money consistently?
• Am I still making the same mistakes time and time again?
• Do I regularly try new trading methods without really putting in the work to master one?
• Is my trading routine reflecting my goals? Do I set aside time to work on my skills, to keep a trading journal and to plan my trades in advance? Am I spending time off the charts at all?

These 4 questions will provide a very clear picture about your mindset. The answer will show whether you are really serious about trading or if you are just looking for a get rich quick method. However, if you catch yourself by thinking “This is not true for me. I don’t have to answer these questions. I will find a good trading strategy somehow.”, you need to rethink your trading approach more than anyone else.

7 tips to kick-start your trading and make a fresh start

#1 – Pick one method and stick with it
This is more like a challenge than a tip. Next time when you want to change to another trading method or make a significant change, ask yourself how far hopping from system to system has brought you. For the next few months, stop trying new things and instead, focus on how to improve the one strategy you have.

#2 – Follow the bottom-up approach
Identify your greatest challenges and problems and work on them first. Don’t spread your focus, but try to make one step at a time. What is causing you the greatest losses? Identify your #1 problem and work on it!

#3 – Establish a trading routine
Instead of doing multiple things at once and being all over the place, pause and reflect. Establish a routine which includes the time for planning your trades, your actual trading time and how you approach trading in general (which instruments, time-frames, how do you monitor your charts, etc.) and how you work on your skills after your trading sessions.

#4 – Stop chasing returns
Don’t try to double your account very few months. This is just not how trading works. Set yourself realistic expectations. The order of priorities should be:
Stop making beginner’s mistakes à Stop losing so much money à Become a break-even trader à Small and consistent profits following a disciplined approach

#5 – Work on your skills offline
Most traders, after closing a trade, will never look at their past trades again. This completely avoids a learning effect and makes improvement impossible. Start a trading journal and regularly review your trades and your past performance.

#6 – Evaluate your mindset and goals
Constantly check in on yourself and evaluate whether your actions reflect your goals. Do you keep making the same mistakes? Did you stop writing a trading plan and a trading journal? Are you back to system-hopping?

#7 – Focus on making the best decisions
Adopt a process-oriented mindset. This means that you trade detached from your P&L and focus solely on making the best trades and decisions. This will often take care of many other problems as well. In this video we explain the importance of having a process-oriented mindset.

Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics

“95% of all traders fail” is the most commonly used trading related statistic around the internet. But no research paper exists that proves this number right. Research even suggests that the actual figure is much, much higher. In the following article we’ll show you 24 very surprising statistics economic scientists discovered by analyzing actual broker data and the performance of traders. Some explain very well why most traders lose money.

1. 80% of all day traders quit within the first two years. ¹
2. Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. ¹
3. Traders sell winners at a 50% higher rate than losers. 60% of sales are winners, while 40% of sales are losers.²
   
4. The average individual investor under performs a market index by 1.5% per year. Active traders under perform by 6.5% annually. ³
5. Day traders with strong past performance go on to earn strong returns in the future. Though only about 1% of all day traders are able to predictably profit net of fees. ¹
6. Traders with up to a 10 years negative track record continue to trade. This suggest that day traders even continue to trade when they receive a negative signal regarding their ability. ¹
7. Profitable day traders make up a small proportion of all traders – 1.6% in the average year.However, these day traders are very active – accounting for 12% of all day trading activity. ¹
8. Among all traders, profitable traders increase their trading more than unprofitable day traders. ¹
9. Poor individuals tend to spend a greater proportion of their income on lottery purchases and their demand for lottery increases with a decline in their income. ⁴
10. Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios. ⁴
11. Men trade more than women. And unmarried men trade more than married men. ⁵
12. Poor, young men, who live in urban areas and belong to specific minority groups invest more in stocks with lottery-type features. ⁵
13. Within each income group, gamblers under perform non-gamblers. ⁴
14. Investors tend to sell winning investments while holding on to their losing investments. ⁶
15. Trading in Taiwan dropped by about 25% when a lottery was introduced in April 2002. ⁷
16. During periods with unusually large lottery jackpot, individual investor trading declines. ⁸
17. Investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. ⁹
18. An increase in search frequency [in a specific instrument] predicts higher returns in the following two weeks. ¹⁰
19. Individual investors trade more actively when their most recent trades were successful.¹¹
20. Traders don’t learn about trading. “Trading to learn” is no more rational or profitable than playing roulette to learn for the individual investor.¹
21. The average day trader loses money by a considerable margin after adjusting for transaction costs.
22. [In Taiwan] the losses of individual investors are about 2% of GDP.
23. Investors overweight stocks in the industry in which they are employed.
24. Traders with a high-IQ tend to hold more mutual funds and larger number of stocks. Therefore, benefit more from diversification effects.

Conclusion: Why Most Traders Lose Money Is Not Surprising Anymore

After going over these 24 statistics it’s very obvious to tell why traders fail. More often than not trading decisions are not based on sound research or tested trading methods, but on emotions, the need for entertainment and the hope to make a million dollars in your underwear. What traders always forget is that trading is a profession and requires skills that need to be developed over years. Therefore, be mindful about your trading decisions and the view you have on trading. Don’t expect to be a millionaire by the end of the year, but keep in mind the possibilities trading online has.

Why You Lose So Much Money Trading

The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.” -Ed Seykota
The above image shows the destruction of capital, not only for a losing streak, but also for a string of 10 trades with a 50% win rate; alternating between wins and losses.
Many things cause new traders to fail. One of the main reasons that traders fail is because they don’t understand the math of capital destruction. The more capital you risk per trade, the quicker you will lose it in losing trades. Once your capital is depleted, it takes a larger return to get back to even than what you initially lost.

• A 10% loss requires an 11% return to get back to even
• A loss of 20% of your capital requires a 25% return to get back to even
• A 50% loss of capital needs a 100% return just to get back to where you started
• Risking 1% of your capital per trade puts you down 10% after 10 trades
• Risking 5% per trade puts you down 50% after 10 trades

No matter how good you are, you can’t trade so large that a single losing streak is your last. If you risk too much of your trading capital, even a few losses in a 50% winning streak will destroy your capital. You’re not going to be perfect as a trader, and you have to play the defense needed to protect your trading account from losing streaks. You will have streaks of 50% win rates and losing streaks. The question is, will you survive them with your current risk exposure.
You have lost money trading because you exposed your capital to too much risk in a single trade. You haven’t been profitable because your losses have destroyed your capital. You have to structure your position sizing so your losses don’t destroy your capital after every losing streak.
“This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty.”
― Nassim Nicholas Taleb