Whether you have been trading for years, manage millions or are just starting, we all have something in common: We all make trading mistakes. Finding trading success is never a direct route and there are many pitfalls a trader can fall into. There are those mistakes that are easy to fix without much effort but there are others that will be a challenge.
Trading Mistakes From The Inside
Looking at the psychological factors that can inhibit our success, there is not a fast way to deal with them except diligence and time. Money makes people emotional and perhaps that is one of the reasons that it is often cited as a major influence on the health of a personal relationship. If people can’t quickly change their thoughts about money to save a relationship, what chance would they have when it comes to trading?
When a trade goes against a trader, there can be a wide range of reactions from simply acceptance of the random distribution of wins and losses all the way to anger.
The anger will cause a trader to do things they know they shouldn’t do such as move their protective stop away from current price which will destroy their risk profile that was originally planned out. This same anger will have this same trader attempt to get back at the market by knee-jerking into a trade that falls outside their trading plan. These types of reactions rarely turn out well and will simply erode not only the confidence of the trader but also erode their account balance.
The fact is that this type of reaction is hard to change.
The question would be “why does the loss anger this particular trader?”
- Were they mad at being wrong?
- Did they put too much pressure on themselves to make money?
- Have they not accepted that the only control we have is whether or not to trade?
It is quite a process to change how we look at trading and more often than not, this person will flame out and move on. Without sound grounding in understanding how our psychological demons can affect how we trade, being a successful trader will continue to stay out of reach. There is no easy fix to this problem and will often require a paradigm shift to, at the very least, take the bite out of its effects.
No Need To Move Mountains
Some mistakes we will come across in trading are a little easier to fix because they have more to do with taking action as opposed to how we think.
One thing you may want to consider is the following:
- How we think will dictate our behavior.
- It is our behavior that will determine our outcome in everything we do.
Whatever method you are trading to make a second income or as full time trader should be covered fully in a trading plan. This plan will have everything from risk parameters to markets to trade and setup criteria. You’ve done the testing and know you have a positive expectancy system in your hands and you just have to follow it. If you are prone to moving your protective trading stop further away from oncoming price, you can just not do it. That may entail using alerts at various price points to keep you from micromanaging every blip that occurs on your trading chart.
If you think the next setup is a sure thing and have a habit of increasing your position size outside the risk protocols you’ve set, have someone else set the trade up in your platform. Perhaps you are easily influenced by other people so you simply stay away from the tips from Twitter traders as well as the various trading forums. There are also those mistakes that happen just because you did not pay attention. That is what I really want to cover because it recently happened to me in a Forex position I was looking to take.
Trade Plan M.I.A.
When taking longer term trades in the currency markets, I will establish the position in the retail market where I can better position size the trades. Remember that Forex does not have a centralized exchange so getting volume data for currency pairs, regardless of what you read, will not be an accurate representation. For volume, I will look at the futures contract for a particular currency.
In this particular case, I was looking for USD strength over the CAD and wanted to initiate a position to reflect that. This is not day trading which means I only have to come in after the markets close to see if anything of interest is setting up. (When I refer to close, FX is virtually 24 hours and I will come in near the close of the stock exchange for consistency) Let’s break down all aspects of this trade and you will easily see the trading mistake I made and it falls right into the “easily fixed” category.
Longer term trend – Weekly chart
We’ve been in an overall downtrend for a few years but this rally is the largest in distance than the last big complex correction back in 10/2011 to 09/12. I have shown the symmetry movement of the last big correction with the red horizontal line shown with #1.
By breaking this red line, price has risen higher than than the last largest correction. That is an indication we could be looking at a change in the overall character of the market.
From a structure point of view, taking out the high at #2 has put the down trend in danger however the high at #3 that was sold with higher volume, was followed by, at this point, a lower high. On this chart, we have not put in a higher low so from a basic trend structure standpoint, shorts are still the play. A higher low would have been made if price had taken out the high at #3. This pullback off the new high can’t be considered a success and at this point, it has failed.
Three possibilities for me to consider:
- A complex correction is forming
- Trend resumption to the downside
- Consolidation is forming.
If you wanted to use an indicator for trend, the 200 SMA for a quick visual aid is riding above price as well.
Trading time frame – Daily chart
A large run up in price has occurred which means CAD strength and after the sell off, price put in a support floor shown at #1. The red lines marked #2 shows that price is making lower highs showing that the bears are selling at lower prices even though price is holding the support. This is a bearish price pattern but we are in consolidation.
My play was looking for a break of the support with volume and then flipping to the USDCAD FX chart and buy stopping the high. You can see with the grey arrow that price broke the support but the plan called for strong volume.
You can see that the volume in the break was weak in comparison to previous volume and it is lower than the average of the last 30 days of volume. There was lack of interest in this breakout from those who matter and therefore I should have sat on my hands. The day before saw higher than average volume as price rode into the support zone without a clean break. That tells another story.
I made a huge trading mistake and that was that I did not fully implement the plan I had for the trading setup.
Daily Forex Chart
We have a bullish price pattern taking place on this chart as the bulls are interested in higher prices even though there is resistance above shown with #1. Price does break out to the upside and using the RSI at #2, you can see that we have not hit an overbought condition. While centralized volume is not available for Forex, I would be happy with price leaving oversold during the breakout or being in an overbought condition.
We have neither on this chart. While I did see price hugging the topside of the zone, there was very little conviction in the hold as seen by the candles. The second day was where I entered the trade using a stop order and there was zero traction in the trade.
Using A Protective Stop
One mistake I do not make, but many do, is forgetting (or ignoring) placing a stop. Every trade has a stop entered upon entry. The stop for this trade was 2X ATR and it was taken out.
The mistakes I made were easy to fix = Follow the trading plan.
Although I did trade with the longer term trend and understood the current condition, I failed to validate the breakout with strength. If I were diligent in following the plan, I would not have entered this trade as the conditions to put the probabilities in my favor were not present.
Trading Mistakes Are Not Equal
If we were to classify trading mistakes, this is not an account ending error. I used proper risk protocols and this trade was planned. It was not a knee jerk entry to make back a loss where I “knew it was a sure thing”. This error could have been a lot worse if I made the mistake of not following one of the most important rules: watch your risk. As traders, we want to look at ourselves as risk managers first. In doing so, I set a volatility based stop and risked a safe portion of my trading account. But I did not confirm the trade and really have no excuse as to why I didn’t.
This is the reality.
Slick marketers will try to sell you all the glitz behind trading. Rarely will they show you losses and especially where they’ve made mistakes in their trading. They will make you think it’s an easy process:
- Find your setup
- Place your trade
- Reap the profits
It’s never that easy and there will most times you will contend with other factors and not just the 1-2-3 path to riches.
The point is that mistakes will happen and the severity will depend on what side of the line it falls upon.
Throwing risk protocols out the window or letting emotions dictate your actions is something to avoid at all costs. My mistake is an easy fix. Ensure I follow all aspects of the trading plan so these errors do not cost me in the future. If I am to lose a trade, I want to lose by doing things right. Ensure that you are taking your trading mistakes seriously. Immediately act to get a handle on the mistakes especially if they are causing you to constantly ignore a more professional standard of trading. There are many things we can’t control in trading. The ones we can control, like simple trading mistakes, we’d be smart to take measures to reduce them happening in the future.