There is nothing more frustrating than seeing yourself making the same mistakes over and over again, despite your best intends and efforts and witnessing these 5 trading mistakes costing you dearly along the way. Not taking profits, averaging down my losses, continuously changing my trading system, falling victim of overtrading and trading what I wanted to see, you name it and I’ve done it.
I have lived this experience many times over and despite realizing some of my mistakes, there was always a kind of “it’s different this time” situation that made me ignore what l should have learned and in a twist of irony made me repeat it all over again.
So, with no further delay, here are the five most important ones…
1. Not taking profits.
Greediness – I have been many times in a situation that the market had already gave me two times my stop loss in paper profits and I hadn’t moved my stop loss to at least breakeven or cover just one third of my position in profit. The reason was that, by the time I saw my profit to be double my risk, I got greedy and was fantasizing about larger gains and returns.
Unreasonable Expectations– It is necessary to acknowledge that even in the largest home runs, – which do not happen every day- the market will make some pullbacks to regroup and continue. As a result, it’s not only wise to take some profits or at least lock them with the trailing stop when you are making some, but is also wise to expect the market to make a pull back. It never hurts to book profits and return to the market with more capital or lock you profits and use them to add more trades with the same risk.
2. Averaging down losses.
Anchoring bias– This has been a painstaking experience in my early years in trading. The reason was simple. I was 100% sure, that I knew that the market was about to turn and that I was correct. As a result, I would change my initial stop loss so to let the market breath more and I would initiate another trade to average down my paper loss and recover more quickly, in the eventual turn of the market.
I cannot tell you how many times this had cost me dearly in these early years. Finally, I had to accept that when I am wrong, I am wrong, and I need to make sure I survive another day to trade the next opportunity that could be the one to lift my equity to new heights. Nobody can predict the market and nobody can be right all the time. It’s in the times that you are wrong, that your actions define whether you will be there, the next time you are right to take advantage of it.
3. Not sticking to your system.
The Market is Unpredictable – Not sticking to a system in times of bad outcomes is one reason many traders fail to see their system shine during the good times. Deep down this tendency is due to our need to predict the market and find a system that is the closest it can get to the “Holy Grail”. This is impossible and simplicity trumps complexity many times over.
The only way to avoid this psychological bias is to accept that the market can do anything at any time and that you cannot hold yourself responsible for not predicting that market or outcome. Rather its better to accept the random sequence of your trading system’s outcomes and make sure you stick to your system for an many outcomes needed to play-out its edge.
Focus on What You Control – The only thing you can do and can hold yourself accountable is whether you stick to your trading system, money management and risk management. This is the only way you can succeed in the market, despite what the market does.
Fight the Urge – The urge to trade to overtrade can be very strong especially during good times whereas you can feel euphoria and being on top of the market while your trading system is nailing it and profits are piling up. These good times are equally dangerous as the bad times if caution is not exercised to protect your hard earned profits.
Taking the Money – Once you are a on a good stride, you need to mind two things:
#1 Minimize Risk – It’s commonsense but at the time it could seem as nonsense. It is in these times that risk is often forgotten as confidence and euphoria takeover to eliminate any concern and leave your profits unprotected without proper stop loss trailing to minimize your risk and lock those profits.
#2 Take Profits – Similarly when profits are piling up is often easy to get carried on and ignore that almost silent whisper that urges you to take some profits. It has happened to me many times, only to see the market coming back and even stopping me at a loss, while leaving decent profits on the table. There’s nothing worse than that and is a stomach churning experience.
5. Trading what you want to see instead of what you see.
Hindsight Illusion – Sometimes the market will be in a state where it makes no sense. Moreover, the market can be in such a state that only in hindsight some trading strategies that you might have read about and do not use as part of your trading system, could have worked and produced some return.
Discipline to Preserve Capital – It is in these times that as a trader you have to be cautious and avoid forcing yourself to see what you want or need to see to justify a trade. A famous quote says to ‘’trade what you see rather than what you want to see’’. This couldn’t be more truthful.
I have caught myself many times to do exactly the opposite due to boredom, lack of excitement, desperation to take action and other emotions than made me anxious in finding a familiar pattern that could justify trading.
Market Phase – Unfortunately, it was during these periods that my equity started to decline and only in hindsight I could see what strategy the market needed to give a small return that was anyway not part to my trading strategy and style. The market phase was not right for me and I should have waited on the sidelines and rest with it, until it was ready with my trading capital intact and ready to be deployed under the right circumstances.
Trading can appear misleadingly easy in terms of execution, but time after time it’s easy to fell victim of your own emotions. In hindsight, everything seems to work, but when the time arrives to make the right call, the path of less emotional resistance is to make otherwise and then wonder how on earth you have lost such a potentially lucrative trade.
Thankfully there is a remedy to all these, through five simple rules:
- Always take some profits home so you can always feel like a winner.
- Cut your losses short and live another day to trade. You never know how good the next trade might be and you need to preserve your capital to exploit it.
- Stick to your system or methodology in times of good and bad, as every system goes through various outcomes regardless of its accuracy or edge.
- Resist overtrading and rest when the markets rest.
- Trade what you see based on your trading rules and not what you wish to see.
Please feel free to share your thoughts, own experience and suggestions. I would love to hear your thoughts.