You’re about to learn the main reasons behind the massive failure rate of retail traders and how you can avoid them and enjoy the incredible earning and lifestyle potential from consistently taking money out of the financial markets. Why only 5% of retail traders make money and what you must do if you want to join them .....? What many people don’t understand about trading – or refuse to acknowledge is that success in this business is 10% down to having a winning edge or system and 90% down to mastering trading psychology. The most common example of this is people who can trade like superstars on a demo account then go on and fail to make any profits when real money is on the line. When real money gets involved it brings with it all kinds of ‘demons’ that see demo superstars blow their live accounts and give up trading for something else.
If this is you then please understand that there's nothing wrong with you, it’s very normal for people to allow emotions and instincts to overrule their decisions when money is on the line. Your broker knows this which is why they offer the incentives they do for people to open accounts and start trading.
Taking control of your trading demons is a process that anyone can do, it takes time and effort but the rewards are more than worth it. What you’re about to read is a list of the most common trading mistakes that we are naturally conditioned to make. They are not psychological deficiencies at all, they just need to be unlearned in order to turn a bad trader into a good trader.
A good trader can trade a system without second guessing his or her rules and can stick to a trading plan. A bad trader cannot or worse still doesn’t even have any rules or plan. Good traders are just bad traders who learnt harsh lessons and made a decision to go through the process of changing their habits to become good traders. They have done it, I have done it and now so can you.
In fact you may even be aware of these mistakes but still make them. If you read through this guide thinking to yourself “I already know this” but are not doing it and are not profitable because you are not doing it then this article is especially for you. Ready to get started? .... OK let’s get into the most common mistakes that cause such widespread failure among the retail trading community and what you can do to avoid them. First we’ll look at the main mistakes new and inexperienced traders make, they have many underlying causes which we’ll go into a bit further in part 2 of this guide.
Mistake 1 - Gambling
Many people who open accounts with brokers, download their trading platforms and start clicking buy and sell are nothing more than gamblers using the markets as their ‘game’ of choice. Anyone can do this, there is no minimum education or experience requirement to start trading. Although this doesn’t necessarily apply to those interested in actually learning to trade it's very easy to slip into gambling mode if the tendency isn’t kept in check. The most dangerous time when a trader is highly susceptible to start gambling is after a loss or string of losses. Losing real money causes emotional reactions and after a bad loss or streak it’s very easy to throw the rule book out of the window and go into gambling ‘death or glory’ mode. The margin call is where this ends up in pretty much every instance.
How to avoid gambling instead of trading:
Have a trading plan and a strategy to handle losses and stick to your rules. Have an alternative activity lined up for when that loss comes and you have an emotional reaction. Go for a run, hit a punch bag, play a video game, do something to work out the frustration and don’t come back to the markets until it’s out of your system. Recognize what is happening inside you and refuse to let the gambling compulsion call the shots. You can be in control or it can be in control. If you want to make it in this business you must be able to take complete control of your actions when emotions and instincts can lead you astray.
If you’re not following a plan and don’t have a set of rules and a decent system then make this your number 1 priority. Don’t make any live trades until you’ve done this. Read on to find out more about developing a plan, set of rules and finding a good system.
Mistake 2- Poor or non-existent risk management
It amazes to see how many newbies come to forums and ask the following question:
“Is it true that the real pros don’t use stop losses?” Pro or not – your job as a trader is to manage risk. This is the key to your success or failure in the long term. When you control your risk you can control the downside you are exposed to. New traders, gamblers and frustrated traders going into ‘death or glory mode’ do not manage their risk or manage it poorly. Trading without a stop loss or moving your stop loss further away when a trade goes against you is a surefire way to a blown account.
How to manage risk.
Risk management goes beyond just having a stop loss. Obviously using a stop is key but your trading plan needs other failsafe’s as well such as: Maximum risk exposure of all open trades at any one time – ie what’s the maximum risk to your entire account you’re prepared to have at any one time from all open trades? Don’t take correlated trades – ie. If you see great setups on EUR/USD, GBP/USD. AUD/USD and NZD/USD don’t take them all, because if something big happens with USD and it goes against you and you have 4 positions open… Include volatility in your stop loss strategy – if you know how volatile an instrument is then you can set your stop to account for it and be less likely to be stopped out by a whipsaw or big money stop hunting. Use a volatility indicator like ATR (Average True Range). Manage your trades as they go in your favor – get your stop to breakeven and lock in profits, you can use volatility for this as well. Trade management is a complex and very discretionary subject but the point I’m hammering home here is that the protection of capital is more important than making a profit.
Mistake 3- Poor or non-existent money management
This goes hand in hand with mistake #2 but it has a slightly different description. Risk management deals with where you will exit the market if a trade idea doesn’t work out. At which point will you kill the trade. Money management deals with how much % of your account are you prepared to risk on a trade. Complete beginner traders do not practice any form of money management. They will put on large positions and risk losing their entire accounts in 1 or 2 trades. Bad traders know about money management but risk too much trying to make too much money (greed) – or they throw money management rules out the window when ‘death or glory’ mode kicks in.
How to implement money management.
Decide what % of your account you are prepared to risk on any single trade and calculate the size of your position accordingly. Most people risk 1-2%. I personally risk 2%, I see any more that that as a recipe for disaster.
Mistake 4- Overtrading
This is a big one that kills off most people, it’s very very hard to shake off and usually takes years of painful and expensive losses to finally drum into people’s heads (including my own). Once a trader learns how to use risk and money management and gets the importance of these 2 vital elements of their trading plan – they get wiped out by overtrading…..
Overtrading is when you take way too many trades and end up with a much lower win ratio than your system should be delivering. You find yourself looking over and over the charts for a signal – any signal until you end up curve fitting and seeing what you want to see instead of what’s really there. You’ll find yourself jumping into trades early before a valid signal has happened. You’ll feel a sense of agitated restlessness when you’re not in the market and a strong compulsion to get into a trade – any trade!
Read the words in bold in the above paragraph – are they conducive to trading well? Do you identify with them at all?
How to avoid overtrading
This is a tough one because it tends to be a lesson learnt from experience. You need to think about how much risk you are prepared to endure and how much ‘work’ time you want to spend trading. There’s nothing more frustrating than making some nice profits then giving them all back on crappy trades.
Log every trade you take and write how you feel about it. Then go over your logs and pick out all the ones you should have not taken. Do you see any patterns? Challenge yourself to take only a certain amount of trades in a week or month. Learn to just watch trade ideas and how they play out instead of jumping on all of them, you will gain confidence from doing this.
Accept that leaving money on the table and missing some big moves is perfectly acceptable in this business. Having no position is a position in itself. Being "flat" is how most successful traders spend most of their time. See every trade you take as having to cross a busy freeway. How often would you want to do it and would you do it when you had a 60-70% chance of getting to the other side or would you wait until you had a 90-95% chance?
Mistake 5 – Chasing the Holy Grail System
A common mistake many traders make is adopting a mindset that the system is the key to making it big in the trading business. This isn’t made any easier by the amount of people selling magic button ‘holy grail’ systems that claim to make huge profits regardless of the trader’s knowledge or experience. However as a beginner or losing trader how will you find the most suitable system to achieve your objectives? The answer to this lies in how much work you are prepared to put into developing your trading plan and system.
The ‘mistake’ that people make is hopping from system to system and looking for the ‘Holy Grail’ as an answer to their lack of success when really the area they need to work on is themselves, their plan, their rules and not making the other mistakes mentioned above. As you already know – a good trader can take an average system and make money with it, a bad trader can take an excellent system and lose money with it.
How to get away from the Holy Grail system chasing mindset
The key point to grasp here is that the answer to your becoming a successful trader is – how trade. It’s not external – ie a system that you may or may not adopt. Systems change as markets change and evolve and good traders adapt and develop their own systems that match their own situations, personality types and objectives.
- Do you have a busy job and family life? If so then short term day trading will not suit you.
- Are you interested in stocks or options or forex or commodities?
- Are you a visual charts person, or do you like analyzing fundamentals?
- Are you interested in economic developments and news releases and what they mean?
- Do you like crunching numbers and statistics?
- Or do you just want to trade off of chrts?
- Do you like fiddling around with indicator settings or even coding your own?
These are all questions that will have different answers from different traders. What works for one person won’t necessarily work for you. Take some time to develop your own system based around what interests you about the markets. It’s not that hard or scary developing your own system and when you’ve done it you can adapt with the times and make it in the long term. A lot of professional traders have different systems for different market conditions (trending, ranging, short term, long term). Don’t blindly follow others and think that the Holy Grail system is what you need. The Holy Grail does exist however – you can find it between your ears.