The surest and fastest way to trading success?
It is to avoid the mistakes, the pitfalls, and to focus on what really works.
While I can’t presume to know everything about trading, in my decade plus of trading and research and conversations with traders, here are the some of the common trading mistakes.
Why Most Traders Make Mistakes
Seven trading mistakes are presented here. But, taking a step back first, why do most traders make mistakes?
From my observation, simply because they never learned about a better way to trade. It’s not their fault. If no one ever taught them or explained to them, how is a trader to know what to avoid and what to focus on?
Trading Mistake #1: They Don’t Know How and Why A Market Moves
A trader enters the markets with such enthusiasm. They can proceed forward with various charts and indicators.
But do they really know how the market moves?
Do they really know why the market moves?
In my experience, most traders do not really know how and why the market moves. Even with all these new trading books coming out every year, how many of them teach you what really moves the market? The answer is not many of them. Less than 5% do.
This lack of knowledge about order flow and market structure kills most traders. They don’t know the foundations of market prices moving up and down, so they struggle to build a successful system with a trading edge.
Trading Mistake #2: They Don’t Know How to Interpret Information Flow
Since a trader usually does not know how and why a market moves, they can also struggle with interpreting news and information flow.
If one thinks about it, there is all this information generated every day. Both on the chart and outside of the chart.
The trading information generated on the chart can include the price/bar patterns, the chart patterns, the technical indicators are doing their calculations, etc.
The information that exists outside of the chart (which is usually the most lucrative), can include elements such as sentiment, news, global macro, etc.
But how does a trader sort it all out? How does one know what to focus on, to give your undivided attention to, and what to immediately avoid?
Here’s an example from this year.
There were a few traders I talked to this year and they wondered if they should short equities.
And I told them: Well, all these North Korean tensions, missile launches, etc, and the market won’t go down much or stay down for very long. That shows bullish sensitivity. And there was economic improvement in US, Europe and China, so there was definitely at least a slight bullish bias for equities, even as the Federal Reserve gradually removes monetary policy accommodation. And even though valuations are high, that doesn’t mean they can’t go higher. The global macro bias for the market was higher. Hence the current +14% rally so far for the year 2017.
Other people told me they liked gold, they liked bitcoin. And I told them I didn’t see any opportunity in that. I did tell them I much preferred to have long equity exposure this year. I much preferred a long AAPL position rather than long gold or long bitcoin position.
Those traders who wanted to short equities, did not know how to read the news, read the market action, read the global macro. They could have done much better and generated greater profits for themselves this year.
Trading Mistake #3: Trade at Too Big of a Position Size
If a trader does not know how and why a market moves, and they don’t know how to interpret information flow, they can fall victim to this third mistake. Which is that of trading with too big a position size.
After all, if a trader gets all caught up in the emotions and excitement, funds a trading account, and then starts placing trades, there is a good chance they will be overtrading, and placing trades with too big a position size. They don’t know any better.
They are having visions of making triple digits in a year, or of making double digits in a single day and start placing lots of trades and big trades as well. They get this feeling inside of them that they are going to make 100% or 1 million bucks in a single month and swing for the fences. And they don’t know how to spot a good trade or a perfect trade.
One of the top hedge fund traders in the world once said that the biggest mistake he sees is that people trade with too big a position size.
People who trade too big, typically have very strong desire, very strong willpower. To massive action and putting a lot of their money on the line, etc. However, they just have to have a bit more wisdom to figure out how to more properly channel such strong desire. You cannot go in, guns blazing, and go for the jugular on every single trade. You require knowledge and wisdom to know when to do that.
They can be taking risks for 5% or 10% or more of their account, when they should be trading much smaller. A lot better to start out risking 1% or 2%, or even less than 1% on a single trade. Giving yourself a lot of “swings of the bat” is important when you are starting out. As you want to do all you can to avoid the situation where you lose too much or blow a trading account before your skill and edge kick in and make you a million dollars.
Again, if a trader does not know about how a market moves, why it moves, and how to interpret information flow to structure trades, then how can they possibly have proper position sizing strategies? For proper position sizing, it helps greatly to know exactly how the market moves, why it moves and how big of an opportunity is presenting itself via the interpretation of information flow. Then, with greater clarity on those elements, you can get to a more proper position sizing.
As I am writing this, some rookie traders are getting all excited about trading bitcoin. They are funding an account, with what must be some dubious brokers. They are placing trades to buy bitcoin, which can be very volatile in a single day. They don’t know why the price moves up or down! And they just place a bunch of trades, which invariably they are trading at too big of a position size.
Trading Mistake #4: Believe the Market Knows What Position They Have On
If a trader does not know how and why a market moves, how to interpret information flow, and trades at too big a positon size, they can suffer losses. And these losses can make them cynical about the market. They might think the market knows what positions they have on and is moving against them and their stop losses are getting hit and they are getting shaken out of trades.
When an aspiring trades takes losses, a lot of consecutive losses, they might grow cynical. After all, they feel they are trying so hard, thinking so hard, etc.
The truth is that the market cannot possibly know what position you have on, or what trade you have on.
The market is IMPERSONAL. It cannot possibly know or care about your order. The only exceptions in history have been some very large hedge funds having on large positions. But generally, if you are a small or medium sized player in the market, the market doesn’t know or care what your position is. Even when George Soros broke the Bank of England in 1992 by shorting $10 billion of British Pounds, the market did not care. The market was still going to do it’s thing.
Whether you place zero trades or a dozen trades today, the market is going to keep on doing whatever it wants to do – according to the “underlying forces,” the macro forces. The market cannot possibly know or care about what trade you just placed or what positions you have in your portfolio. The only exception is if it is a very large hedge fund using a lot of leverage. That is the exception. In most cases, the market doesn’t care about your trades.
When you attain the awareness that the market is impersonal and moves according to far more natural “macro forces” this is an extremely liberating and freeing feeling. New horizons and opportunities open up for you.
Trading Mistake #5: Not Having Trading Habits
Someone decides to be a trader, whether part time and full time. They wake up, grab some coffee, go into their trading area, and… then what happens?
Do they have any habits, any process to work that can generate positive results?
For me, it was one of the worst feelings in the world, one day waking up, money in a trading account, firing up my trading platform, seeing all these prices flickering and fluctuating, and then wondering…. Well what do I do? It’s that feeling that hits you in your gut. That’s when I realized I had to change and develop real HABITS, that could work for me, day in and day out.
That feeling of being a new trader and waking up bright and early in the morning… and not knowing what you should be doing to analyze the market and find profitable trades. A rotten feeling.
It’s usually a mistake not having some kind of plan. It’s usually a mistake not having trading habits.
This can be corrected – with HABITS. Whether those habits take 5 minutes or 30 minutes. Have habits that give you a trading edge.
What habits do is allow you to focus your excitement and ambition… onto magical habits.
Focused on establishing effective habits.
Trading Mistake #6: They Spend Too Much Time on Trading Forums / Poor Time Management
This was a mistake I made in my first year or two as a trader. I spent far too much time on the trading forums.
Also, my time management was poor and I was allowing too many distractions during the market hours and research part of the day.
Why was I spending too much time on the trading forums? Why was my time management weak?
The reason was probably due to my lack of habits. When a trader does not have proper habits, you can naturally desire to spend your trading time in another direction. Where is that somewhere? Well, since trading can at times feel like a solitary profession, people like to be social – via the trading forums. So they go and view the various forums threads and participate there.
Back then I didn’t realize what I know now. Which is that 95-99% of that information was not accurate, relevant and powerful. Most of the information was useless. I was trying to search for diamonds in the garbage. And I was wasting so much time. I knew I had to change. I had a massive desire for something different. But what was that change I could make? That was when order flow trading was discovered for me and I developed my trading habits I could use every day.
Trading Mistake #7: Lack of Proper Success Environment / Atmosphere
This is your trading room. It’s not a sweatshop. It should be a place that energizes you, inspires you, fills you with good trading ideas, etc.
It is your sanctuary. Treat it as such. Really think about it’s design, about what goes in and out, what goes on your walls, etc.
You don’t want to just have blank, white walls in your trading room. You don’t want to just have a simple, clean desk all the time. You want to strategically place valuable material on your desk and around you that will energize you, inspire you, fill you with good trading ideas, etc.
Some of the key elements I have in my trading room, environment and atmosphere are things such as my handy checklist for the 8 Rules for the Perfect Trade. I have my list of various exit strategies. I have index cards taped to my trading monitors of really big trades that could be setting up in the near future. I have a binder filled with charts and explanations of the greatest trades in history. I have pictures of friends and family. Those are just some of what makes up my “success environment and atmosphere.”
If you want the highest possible chance of success (and you should!), then really place yourself in a trading environment conducive to your maximum success.
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