Possibly the Biggest Trading Mistake

Let’s face it, some people are just not cut out for trading. They may not have the skill-set or passion required to make it as a trader. However, it’s my view that although the vast majority of traders fail to achieve long-term success, most people don’t fall into this category and whilst there are certainly a number of factors to why people struggle to make it, possibly the biggest trading mistake you can make is self-deception.

So let me give you an example of what I mean and see if it rings true.

You’ve had a few decent days on the spin where you’ve made some good money and traded well in your own mind. You think that you might just have turned a corner. Then BAM!! – you lose a load of money by failing to take you stops. Again. You try your hardest to figure out why this has happened to you time after time. You consider quitting. You probably feel pretty terrible about yourself. After a few days, the pain subsides a little and you decide to trade and prove to yourself that you really can take your stops. You trade okay. You make a little money and you take your stops when they come. And the cycle continues.

Biggest trading mistake?

Really, most people aren’t dumb. They’d probably find it very easy to see this repetition in someone else’s trading. But when it comes to themselves, people seem to be able to repeat these same mistakes over and over. So what gives?! Self-deception.

Of course this is entirely unintentional and an easy trap to fall into. Let me highlight the most obvious piece in the puzzle. When the trader in the scenario I’ve just described eases back into trading, they are really trying extremely hard to ensure that they stick to their stops. Plus, they want to feel good about themselves after taking an emotional battering. They make every effort to ensure they do what they already know they need to do in order to control risk. BUT, they do this under highly controlled circumstances.

Of course you can’t control the market. But the trader will focus on their risk and avoid threats in the market. By doing this, they never let themselves get into a situation where they are under severe duress. They are not practicing the very situation that has caused them to spiral out of control and lose a load of money.

A finer point

But there’s a more subtle piece of deception in the build up to meltdown. When this trader is stringing together a few good days, almost invariably they are not strictly adhering to their rules. Sure, they’re making money, but they’re also getting away with poor trading. This is the kind of thing that only lasts so long before it comes back to bite you in the ass. The critical thing here is that most people recognize that this is happening but they sweep it aside as they are feeling good about their trading. So begins the self-deception.

The ironic exercise

The subsequent self-deception behavior of the trader where they go into a risk-centric trading mode is a big problem. The irony of it is though, if it’s done for the right reasons, I think most will understand that trading in this way can be a positive exercise. But it must be a core belief and a modus operandi, not a method to massage a bruised ego. If you can focus on risk first when trading, half the battle is won.

The warning bells

Complacency is something we must recognize no matter who we are and what our experience level is. Part of experience is knowing when things don’t feel quite right. These warning bells can go off at any time and it is our job as traders, to ensure we never ignore them. It takes some practice to heed these warnings and to act on only those that are a genuine threat.

Monitor for complacency and errors

Simply heeding warning signals is not enough to lift the veil of self-deception. You need to actively monitor for these signals too. This means constantly measuring errors, mistakes and rash behavior in spite of P/L figures. You might think that if something doesn’t cost you money in one instance, then it can’t be a problem. But if you aren’t trying to assess these issues, you might be sitting on a ticking time-bomb.

Practice under duress

I’m not suggesting for one minute that you start trading bigger or under more volatile circumstances in order to learn. This wouldn’t be very sensible at all and would be likely generate over-sized losses. But you do need to simulate these circumstances somehow and honestly this is no easy task. But one thing that might be useful is to practice your strategy on a simulator either using a much faster moving product (e.g. crude oil) or when you are much more likely to get extreme volatility (e.g. over NFP releases) – with the express intent of trying to make pretend cash whilst also religiously sticking to your stops.

Ultimately, fixing any particular trading issue usually isn’t particularly easy and it becomes far more difficult when you are constantly pulling the wool over your own eyes. Recognition of self-deception is the first step on the road to taking control of a situation.

Trade well.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.