7 Major Trading Mistakes

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The 44 Most Common Trading Mistakes That You Probably Still Make

The 44 Most Common Trading Mistakes That You Probably Still Make

Awareness is the first step towards improvement and that is why we collected the 44 most common mistakes a trader can make. Making mistakes is not bad at all and it is part of the process, but when mistakes are made repeatedly, bad and unprofitable habits are formed. The more bad behavior you can eliminate from your trading, the better.

General Trading Mistakes

1. Changing your trading strategy after 5 losing trades in a row
Losing is unavoidable and even the best traders will regularly realize losses. Changing your approach after a few losing trades sets you back on the learning curve. Stick to your approach, every losing streak will end.

2. Not expecting the unexpected
A sudden market collapse, an unexpected news release or the loss of your internet connection can happen at any minute. Be prepared by having a fixed stop loss in place. If a single trade could wipe out your trading account, you have not done your homework as a trader.

3. Not keeping track of relevant news releases – denying the importance of news
Even if you are a purely technical trader, you do not have to trade the news, but you have to be aware of them at any point in time.

4. Not being prepared
Do you just fire up your computer, start your trading software and dive into the charts? Just like a plane pilot doesn’t just ask his co-pilot after the take-off where they are heading, a trader needs to have a detailed trading plan for the upcoming trading session.

5. Not doing a post-trading analysis
What you do after your trading session is over determines your future success as a trader. The professional traders analyze their trades, crunch data and plan for the next day.

6. Not using a trading journal
One of the surest signs that you do not have a future as a trader is when you do not have a trading journal and claim that you do not need one.

7. Not fully learning one method
The consistent losing retail trader jumps from one method to the next, hoping to stumble over the Holy Grail. You have to accept that there is no superior trading method and that it comes down to your abilities to make a trading strategy work.

8. Failing to adapt to changing markets
Once you find a way to consistently make money trading, the work does not end. Financial markets are ever changing and evolving organisms. If you fail to adapt to changing market conditions, you will be out of business shortly after.

9. Letting hindsight influence your trading
Amateur traders watch a trade after they have exited it and beat themselves up if they have entered too early. Other times they try to find reasons why a trade was a loser to change their whole trading approach on the spot. The professional trader collects data and makes educated trading decisions based on a large enough sample size.

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10. Not understanding the difference between long term and short term perspective
Over the short term, anything can happen. You cannot control the outcome of your trades and you can certainly not predict the outcome of your next two, three or even ten trades. But over the long term, that does not even matter. If you have a trading strategy that has a positive expectancy and follow it religiously, the only possible outcome is making money.

What Traders Say

11. A smaller stop loss means less risk
The distance of your stop loss has no relation to the potential risk of your trade. Risk is measured in a potential loss of your trading account. You have to set the stop distance in relation to the take profit distance and the trade size to get an idea of potential risk.

12. You measure performance in pips
A sure sign that traders don’t know what they are talking about is when they start comparing profits in terms of pips. Pip measurements are totally random and have no value of expressing performance. Pips are relative!

13. Claiming that winrate and risk:reward ratio are useless
Whereas by themselves a winrate or a risk:reward ratio has no value, together they are all a trader needs in order to determine his future trading performance. The combination of risk:reward ratio and winrate is one of the most powerful concepts in trading.

14. Making claims such as: “Make up to $2000 per day daytrading”
Talking about absolute numbers in trading is an easy sign that someone is trying to scam you. A possible return can only be stated in percentages. However, without talking about the risk involved, stating potential profits is a pointless and dangerous thing.

15. Blaming HFT and algorithm trading for your inability to make money
HFT and algorithms are not the reason why you cannot make money. High Frequency Trading and trading algorithms are nothing but new technologies that change the way the game is being played. Traders were scared that the telephone, computers and the internet are going to destroy trading opportunities. Go back to #8 and read it again.

16. Believing in price forecasts
“If someone knew that the price will go to $40 tomorrow, it would go to $40 today.” It is impossible to predict where price is going to go in the future. Because of the numbers of traders, economists or so-called ‘trading gurus’ and the amount of forecasts, you will always find a handful of people that guessed right. Don’t blindly follow someone who was plain lucky.

17. You use the words casino, boring, firework, killing it to describe your trading day
Markets go up and they go down, sometimes they move fast and sometimes a little bit slower, but it is the nature of how financial markets behave. However, if you are trading because of a thrill and excitement, you won’t last long in this business. Adopt a professional mindset and use appropriate language to avoid emotional trading.

18. You use absolute words like never and always to talk about what is going to happen
Using absolute terms in trading is a very dangerous thing to do, always! If you have seen that a certain setup has worked 100% out of the last 20 times, it can very easily fail when it occurs the next time. And just because you have never seen prices going sharply against you, it is still not an excuse to not use a stop loss order or take a bigger position.

19. Using the words ‘hope”, “wish” or ‘feel’ when talking about a trade
If you hear yourself saying or thinking that you hope or wish that price is behaving in a certain way, exit your trade immediately and do not trade any further. Traders have to rely on hard facts and trade based on actual statistics of proven methods. Trading based on emotions is a major reason why retail traders fail consistently.

Risk & Money Management

20. You watch your floating P&L
While being in a trade, do not watch your account go up and down with every tick. It will result in emotional trading decisions.

21. Thinking about what you can do with the current profit or what you could have done with the loss you could take
Only risk what you are can lose comfortably. Trading too big results in trading decisions that are based on fear and greed, the two biggest enemies of traders. On the other hand, trading too small makes you sloppy and more likely to abandon trading rules and risk management.

22. Not paying attention to correlations and how they increase your risk
Financial markets are highly correlated. Traders often believe that by taking several trades in different instruments they are diversifying and lowering their risk. What these traders don’t realize is that, especially if your trading instruments are somehow related, they often move in sync and instead of decreasing your risk, you are actually increasing it.

23. Using a fixed stop loss with the same pip amount on different instruments
Traders who use a fixed stop loss with the same pip amount on different instruments and/or different timeframes haven’t understood the rules of the game. There are no shortcuts to trading success and developing a sophisticated and tested stop loss strategy is just as important as knowing when to enter a trade.

24. Underestimating the significance of drawdowns and their statistical likelihood
Most traders believe that if a trading strategy has 5, 6 or 7 losers in a row, it cannot be a good trading strategy. What if we told you that a trading strategy is still valid after 10 losing trades in a row?

25. Adding to losing positions
This is a big no-go! Learn to take losses because they are normal. Trying to delay the realization of losses is the death sentence for your trading account.

26. Risking an arbitrary number of 2% on each single trade
Setups vary in quality and your position size should account for that. Learn to distinguish between different qualities of setups and entries and use a professional position sizing approach.

27. Ignoring the importance of spread
Research discovered that only about 1% of all day traders are able to predictably profit net of fees. Spread is the cost of doing business as a trader and, therefore, finding ways to minimize your costs should be high on your priority list.

28. Holding losers while selling winners
Research discovered the so-called disposition effect which states that on average, traders sell winning trades 50% faster than they hold losing traders.

29. Trading an account that is not the right size for you
Whether your trading account is too big or too small, both scenarios are less than optimal and have negative effects on trading performance because they are the cause of emotional trading decisions.

30. Denying the importance of math and statistics in trading
Math and statistics are boring and hard, but it does not matter whether you like it or not, as a trader you have to understand the basic math concepts. In the end, trading is nothing but juggling with probabilities, calculating odds and trying to move them in your favor.

Trade Management

31. Not having a trade checklist
Especially for beginning traders, having a checklist that you go through before you enter a trade can significantly increase your performance. A checklist can keep you out of trades that do not match your criteria and increase your discipline easily.

32. Widening your stop loss order when you see price going against you
This is another no-go. Your stop loss is the place where you accept that your trade idea is wrong. Widening a stop loss orders signals that your emotional responses have taken over and that you cannot make sound trading decisions anymore.

33. Using mental stops because you think it gives you more flexibility
A mental stop loss has no advantages whatsoever. None!

34. Pulling your stop loss order to breakeven
Unless it is part of your trading strategy and you can statistically verify that moving a stop loss to breakeven is the optimal approach, don’t do it. Moving a stop loss to break even is a sign that you are afraid of taking a loss and giving back profits.

35. Moving your stops too close
Price moves in waves and you have to give your trades room to ‘breathe’. Moving a stop loss too close to current price will often get you out of trades that would have gone to your take profit order. Learn to distinguish between minor retracements and reversals.

36. Using the big round numbers or famous moving averages for your stop loss placement
Research showed that price behaves significantly different at round numbers and that the reversal frequency is higher in such places as well. The professional players are aware of the fact that retail traders are lazy and just pick what is obvious and easy and it is even more easy to use this knowledge to their own advantage.

Common Sense

37. Expecting to become rich any time soon
The trading industry created the illusion that with enough leverage, the right trading strategy and some luck you can make a lot of money easily. However, even after years of losing money month after month, ‘traders’ still believe that the only reason they have not become a millionaire is because they haven’t found the right strategy yet. Wake up!

38. Not treating trading like a business
Trading is not necessarily hard or difficult, but the approach of the average trader makes it impossible to earn profits from trading. Testing different ideas, calculating and analyzing data, tweaking, continuous self-improvement, preparation, journaling and discipline are all the things the regular trader does not want to hear about and that is exactly why more than 99% of all traders will never make money.

39. Buying a $10 EA
At one point, traders will give up trading themselves and start looking for trading robots or EAs to make them rich. They then buy a $10 trading robot from a random website or from an unknown guy in some trading forum without even understanding what the robot does and start trading their own money. If you still don’t know why this is a bad idea, you have to find out for yourself.

40. Believing that price cannot move higher/lower
Even when price has been in a prolonged rally for several months, you will always find traders who week after week tell you that the turn is imminent and they are looking for short entries. Traders would do well to focus on what is obvious and join the trend as long as it is possible.

41. Trading your own money and savings after 3 months of demo trading
Even people who have been to college or university and who spend years to prepare for a job and then worked their way up are among those traders that open a demo account, take some random trades and then after 3 months of mixed results start trading their own savings. The possibilities that trading offers are limitless and can blind people, but the pitfalls are just as big and the next margin-call is just one click away.

42. Cursing Indicators while praising candlesticks
Whether you are trading price action or are a follower of indicator-based trading strategies, it does not make a difference to your chance of success as a trader. Although people will tell you otherwise, the strategy you choose has no impact on your trading success. It comes down to how you apply the strategy, tweak the parameters and manage yourself as a trader.

43. Analyzing your performance on a daily basis
Do not try to be profitable every single day, week or month. Trading is a long term activity and you do not have any influence on the outcome of your trades. Your only responsibility as a trader is to find a method that has a positive expectancy, religiously apply it and constantly monitor every little aspect of your performance. Do not try to force winning trades, the markets will show you who the boss is.

44. Following advice from random people
Never ever take trades based on opinions, tweets or promises made by other people. “Give a man a fish, and you feed him for a day; show him how to catch fish, and you feed him for a lifetime.”

Avoid These 7 Mistakes When Trading Binary Options

It takes time to master any new skill and binary options trading in not an exception to that rule.

However, the fact that binary options trading is an online trading venture means that information is readily available and the task of mastering the trading skill becomes far less daunting.

While it is important to know what to do to be successful, it is equally as important to know what to avoid. This guide will give advice on 7 mistakes that should be avoided when trading binary options and which can make a difference between earning and losing money.

Mistake 1 – Shady Binary Brokers

It can be great to take a shortcut sometimes, but not when it comes to selecting a binary options broker. In this case, rushing in can have costly consequences which could have been easily avoided with proper research. Unless prospective binary options trader will not take the time to carry out research and gather enough info concerning available brokers the journey will end before it truly began. And most likely in tears and bitter emotions.

There are over 300 brokers available online today and not all of them offer the same level of quality and commitment.

There are those like IQoption or 24option who have been present on the market for a long time and have an established reputation among binary brokers. There are also brokers like Daweda Exchange or BetOnFinance who are unique and offer traders different approach to trading. Also, opting to go into binary options trading with a regulated broker is always a smarter choice.

With unregulated brokers, there is a danger of scam. Spending some extra time and reading available guides, reviews from broker review sites and general feedback from other traders will point in the right direction.

Mistake 2 – Skipping on Demo Accounts

Another one among 7 mistakes to avoid when trading binary options is skipping on demo account usage.
Plenty of inexperienced binary traders fail to realize just how useful a demo account can be. While it is not possible to make profits with a demo account, this is the perfect training ground for novice traders. Demo accounts are approximations of the real trading accounts, sometimes they are the exact copy, but they have virtual funds. That means that binary options traders get to practice in a completely safe environment without fear of losing funds.

Additionally, most demo accounts are completely free. If they fail to use the demo account traders are wasting a unique opportunity to test the waters and experience simulated binary options trading process. The demo account can provide some experience, provide traders with a chance to get more familiar with the platform, available underlying assets and tools.

Plenty of binary brokers today have a demo account so traders should take advantage of it and practice before the real trading begins as that can provide them with a great starting point.

Mistake 3 – No Money Management Plan

Yet another common mistake in binary options trading is the poor money management plan or, even worse – no plan at all. Just as with the selection of binary brokers, to put together a solid money management plan time is needed.

Many traders approach trading impulsively, simply hoping for the best. This is not likely to bring in the profits they hope to gain.

Investing time into market analysis, knowing about underlying assets and what affects the prices, understanding trading strategies as well as tools and features, are all elements necessary to make a trading plan.

Funds they wish to invest are next in line, and it is advisable to invest up to 10% of the available budget on a single trade. In fact, keeping the investment amount between 2 to 5% per trade is ideal. That way, it will be much harder to slip into impulsiveness and invest huge amounts of money.

Mistake 4 – The Issue of Over-Trading

The mistake of over-trading is the one often found among the ones which should be avoided at all costs. This happens as a result of lack of knowledge but greed plays a part too. Beginner binary traders commit this mistake often and easily because they get carried away and wish to make heaps of money in a short time span.

Alternatively, over-trading can come as a result of traders suffering losses and they wish to compensate by placing trades left and right. Sadly, they usually lack knowledge and understanding of market conditions which only leads to further loss.

This issue ties in nicely with the previous mistake – no money management plan. Traders who devise a plan are less likely to slip into this harmful behavior because more placed trades do not always mean more profits. Less sometimes is more.

Mistake 5 – Only Minimum Investment Approach

While it might be great to start out in binary trading with minimum investment which moves between $1 and $25, if traders persist in only investing minimum amounts the dreams of huge profits are not likely to happen.

This does not mean that traders need to be rash and invest huge amounts on a single trade, but investing more than the bare minimum does increase the chance of making more profits. Speculate to accumulate, as the saying goes. One of the attractive aspects of binary options trading is the affordability factor as most binary brokers demand a minimum deposit of $250.

However, traders who want to make considerable profits have to, at some point, move away from the minimum investment approach.

Mistake 6 – Impulsive Binary Options Trading

Making impulsive binary options trades can lead to serious losses. Yes, on occasion, such trades can bring in great profits but in the long run this is not a good approach to trading. Traders, especially beginner traders, slip into this impulsive mode.

Especially after they experience initial success. Binary options trading is not gambling. Traders need to be calm and cool-headed.

They need to monitor the market and learn as much as possible. Nowadays social trading is becoming increasingly popular and this can be a great way to learn from more experienced traders. Loss, just like profiting, happens and if binary options traders start acting impulsively after each they will probably not be very successful.

Mistake 7 – Neglecting the Importance of Educational Materials

Finally, neglecting the importance of educational materials can be an expensive binary options mistake. These materials are there so traders can learn, upgrade their knowledge and try out different approaches to the trading process. Failing to recognize how valuable they can be is a mistake that should be avoided.

The same goes for not reading through the FAQ section, taking advantage of webinars available with brokers or not following their news or blogs.

All that can be used to make better trading decisions and may, ultimately, lead to great profits from binary options trading.

7 common options trading mistakes to avoid

Learn about some of the most common options trading mistakes so you can make more informed trading decisions. See how Fidelity’s Profit/Loss Calculator, Probability Calculator, and other tools can help in the decision-making process.

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As a new options trader, it is not uncommon to feel overwhelmed. One of the benefits of trading options is that it gives you a variety of ways to take advantage of what you believe may happen to the underlying security. But one of the trade-offs for the luxury of this variety is an increased risk for making mistakes. The goal of this article is to create awareness regarding some of the most common options trading mistakes in order to help options traders make more informed decisions.

Mistake #1: Strategy doesn’t match your outlook

An important component when beginning to trade options is the ability to develop an outlook for what you believe could happen. Two of the common starting points for developing an outlook are using technical analysis and fundamental analysis, or a combination of both. Technical analysis revolves around interpreting market action (mainly volume and price) on a chart and looking for areas of support, resistance, and/or trends in order to identify potential buy/sell opportunities. Fundamental analysis includes reviewing a company’s financial statements, performance data, and current business trends to formulate an outlook on the company’s value. An outlook not only consists of a directional bias, but it encompasses a time frame for how long you believe your idea will take to work.

As you review different options strategies, it is important to make sure the strategy you choose is designed to take advantage of the outlook you expect. Fidelity’s Options Strategy Guide is one way to familiarize yourself with different strategies, and can help you determine the most appropriate one for your situation.

Mistake #2: Choosing the wrong expiration

As with strategies, you are faced with the issue of having a multitude of choices when deciding on an expiration date. The good news is that if you develop an outlook, then selecting the proper expiration generally falls into place. One way to help you choose the best expiration for your outlook is to have a simple checklist:

  • How long do I believe it will take for the trade to play out?
  • Do I want to hold the trade through an earnings announcement, stock split, or other events?
  • Is there adequate liquidity to support my trade?

Mistake #3: Choosing the wrong position size

Most position sizing errors stem from 2 common emotions: fear or greed. If you are greedy when making decisions, you could end up trading a position size that is too large for your account size. This may occur when a trade goes against the outlook and then you’re stuck with a crippling loss. On the other hand, you could be like some traders who trade extremely small. Trading a small size is fine, but you may miss out on a material return.

Common ways of position sizing include:

  • Risk a percentage of your account value
    • 1%, 2%, 3%, etc.
  • Use a consistent dollar value
    • $100, $500, $1,000, etc.

Ultimately, when deciding on the trade size, you should be comfortable with the amount of capital you will lose if the trade doesn’t go in your favor. Ideally, the trade size should be large enough to be meaningful to the account, but small enough so you don’t lose sleep at night.

Mistake #4: Ignoring volatility

Implied volatility is a measure of what the market expects volatility to be in the future for a given security. It is important to recognize if implied volatility is relatively high or low, because it helps determine the price of the option premium. Knowing if the premium is expensive or cheap is an important factor when deciding on what option strategy makes the most sense for your outlook. If the options are relatively cheap, it may be better to look at debit strategies, whereas if the options are relatively expensive, you may be better served looking for credit strategies.

Fidelity’s Active Trader Pro ® offers a tool under Option Statistics that you can use to determine if volatility is higher or lower than normal. The same information can also be found on Fidelity’s Key Statistics (provided by LIVEVOL, Inc.). In the example below, the 52-week range for 30-day implied volatility was 9.98 to 35.68. This tells you the highest and lowest implied volatility levels for a hypothetical 30-day option over the last 52 weeks. If you hover over the fulcrum, you’ll see a popup at the bottom. The popup tells you the current implied volatility level (13.01) and where it ranks in percentile format. The percentile ranges from 0–100 so a 12% reading implies a relatively low implied volatility environment.

Mistake #5: Not using probability

Taking into account the probabilities for your strategy is an important factor when deciding to place a trade. Not only does it put into perspective what is statistically likely to happen, but it is essential to understanding if your risk/reward makes sense. It is important to note that probability has no directional bias. It is simply the statistical chance of price being at a particular level on the evaluation date, given the current factors. You can use Fidelity’s Probability Calculator (provided by Dash Financial Technologies LLC) to help make this determination.

Using the image above, consider this example of an 1140/1150 put credit spread and how probabilities can play into the analysis. The probability of price being above 1150 at expiration is roughly 68% and has approximately a 27% chance of being below 1140. At expiration, any price over 1150 represents maximum gain, and any price below 1140 represents a maximum loss. If you’re only able to collect $2.50 for your $10 spread, then just looking at the probabilities alone, you can see if you are being compensated for the risk.

  • 68% of the time you will obtain the maximum profit of $250
    • $250 x 0.68 = $170
  • 27% of the time you will realize the maximum loss of $750
    • $750 x 0.27 = -$202.50

If you net the 2 amounts out, there is a net loss of $32.50. This means if you continually put yourself in this scenario, the probabilities dictate over time that you should have negative returns, statistically speaking. Keep in mind 5% of the time, the underlying price in this example will fall between max gain and max loss, and the gain or loss on the position will vary, which will affect the net loss calculation positively or negatively.

Mistake #6: Focusing on the expiration graph

As a trader, it is important to constantly evaluate the amount of risk/reward you have on the table and check to see if it still makes sense for your account. Solely focusing on your positions expiration graph doesn’t tell how much risk you carry today, or on a future date.

Using the Profit/Loss Calculator tool (provided by Dash Financial Technologies LLC) can help you see how your position is going to react to price movement not only today, but any day in the future up until expiration.

The light blue line represents position at expiration, the dark blue line represents position today, and the orange line is a date selected in the future. In this example, the vertical white line has been moved to the current market price of the underlying, and where it intersects with these lines tells how much profit or loss in the trade.

As the position stands in this example, you’ve already obtained the majority of profits and have a significant amount of room on the downside to realize maximum loss come expiration if the position moves against you. At this point you may ask yourself, is the potential downside risk worth keeping the position on to realize the maximum gain?

You may consider what would happen if the position makes a large move in either direction over the ensuing days. If it makes a move up, you’d continue to make an additional profit, but it would be a nominal amount in relation to what you’ve already made. On the other side, with a large downward move you may lose a significant portion of the profits you’ve already made. At this stage in the trade, the risk/reward has changed and can go unnoticed if you focus only on the expiration day.

Mistake #7: Not having a trading plan

One of the first steps in avoiding common trading mistakes is to have a sound trading plan. A basic trading plan should consist of, but not be limited to:

  • How much are you willing to risk per trade?
  • How will you find opportunities in the market place?
  • When will you enter the trade?
  • What is your exit strategy?

As mentioned before, fear and greed can lead to irrational decisions that you wouldn’t normally make. The main benefit of having a trading plan is to remove these emotional feelings from your trading. It also creates a process that is easily repeatable. Repeatability is an important factor to help you learn from mistakes and have the ability to see flaws in the trades you place. Without a plan it becomes very difficult to improve as a trader and keep moving forward.

Summary

Trading options involves a number of considerations both before and after the trade has been placed. Many of the mistakes mentioned can be accounted for before the trade is opened by utilizing the tools and resources Fidelity offers. The single most important step to trading options is to develop a plan and stick with it! Some of the tools and resources that can help you establish your own plan include the Options Strategy Guide, Key Statistics, Probability Calculator, and the Profit/Loss Calculator. Take advantage of these and other trading tools and resources Fidelity provides to help you avoid these common options trading mistakes in your future trades.

Top 5 Major Trading Mistakes and How to Avoid Them

This Video will help advanced and beginning traders avoid Major Trading Mistakes. This is the first in a series of training videos focusing on “How To Get Started Trading in the Stock Market”.

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7 Common Trading Mistakes to Avoid for Long-Term Success

10/27/2020 6:00 am EST

Abhay Mehrotra, of AbhayMehrotra.com, shares seven of the most common trading mistakes he sees getting made time and time again and how to avoid them to improve trading performance and increase profits over the long-term.

Timeless Trading Wisdom—How to Correct Common Trading Mistakes

Common trading mistakes and solutions to these trading problems. Most often, these trading errors are due to mental and emotional issues that affect our decision making process.

I have often said that making money trading stocks is simple, but not easy. Once you learn basic technical analysis techniques, have good tools to identify opportunities, and gain some experience at identifying good trading opportunities, the actual job of picking stocks is relatively straightforward. Where most traders fail is in the application of a methodology. The simple and undeniable fact is that we are all human, and therefore, we are all blessed with emotion. When money is on the line, our emotional attachment to it can take over our decision making process. With that said, I thought it would be helpful to examine the common problem areas that are a result of mental breakdowns. By examining the emotional conduits to decision making, hopefully, I can provide some solutions to correct common trading mistakes.

Trading Problem #1—No Patience on Entry

Anticipating a signal that never comes is common for traders monitoring the market closely and eager to get some money working. For example, a good buying opportunity arises when a stock breaks from an ascending triangle. Jumping in ahead of the breakout is not an ideal situation because the probability of success buying an ascending triangle is not as good as buying a breakout from one. What causes this mistake? I think a fear of missing out on the maximum amount of profit or the fear of too much risk in buying a stock are the two most common mistakes. Essentially, the two guiding forces of the stock market are at work here; fear and greed. By buying early, we can realize a greater profit when the stock does breakout since we will have a lower average cost. Or, by buying early we can reduce risk since a breakout followed by a pullback through our stop will result in a smaller loss as we have a lower average cost. What tends to happen, however, is that the stock does not break out when expected and instead pulls back. This either leads to an unnecessary loss or an opportunity cost of the capital being tied up while other opportunities arise.

The Solution

The simple and obvious solution is to wait for the entry signal but there are also some things you can do to help yourself stay disciplined. Rather than watch potentially good stocks tick by tick, use an alarm feature to alert you to when they actually make the break. Watching stocks constantly is somewhat hypnotic and, I think, the charts can talk you in to making a trade. However, letting the computer watch the stock may help you avoid the stock’s evil trance. Another good solution is to focus on different thoughts when considering a stock. Don’t think about potential profits, don’t think about minimizing losses. Instead, focus in on the desire to execute high probability trades. It takes time to reprogram yourself…so persevere.

NEXT PAGE: How to Avoid Small Losses Turning Into Big Losses

Trading Problem #2—Selling Too Soon

We have all felt the disappointment of not selling a stock at the high. When a stock is marching higher, we set a point where we intend to sell so that we can lock in the gain before it goes down. The problem is that after we sell the stock, it continues to go higher leaving us with an opportunity missed. Selling too soon is a problem that I continue to wrestle with after 15 years of trading stocks. I want to lock in that good feeling of taking a profit off the table. I want to avoid the negative feeling of watching a good profit get cut in half by a rapid selloff. And so, I break my selling rules and sell the stock in anticipation of weakness, rather than when the market tells me I should. The result is that profitability over the long-term is not maximized. Once in a while, I may get out of a trade at a better price than I would if I followed my rules, but over ten or more trades, my net profitability is not as good as if I had maintained my selling rules. Keeping in mind that trading stocks is a probability game, it is important to maximize gains on the winners so that the inevitable losers can be overcome.

The Solution

There are few things that can help you avoid falling into this trap. First, go through a number of past trades and apply your selling rules to see what your net profitability would have been if you had been disciplined and compare those with what you actually achieved. I did this and it gave me powerful proof that maintaining discipline pays off and is worth striving for. In fact, when I did this over one particular one week period, the difference amounted to a pretty nice new car. That gave me the leverage on my emotions I need to overcome them. Second, turn off the profit and loss indicator that most brokerages and trading platforms give you. How much you are up or down is irrelevant to the decision making process. Since we have an emotional attachment to the money, knowing that we are up a certain amount and then seeing that shrink on a normal pullback in a stock leads us to make an emotional decision. Finally, remember to sell at floors, not ceilings. Do not limit the upside movement of a stock by setting a price target, but instead, limit the downside movement by setting a price floor. Sell a stock when it pulls back to a floor, rather than selling it in anticipation of it reaching a ceiling price.

Trading Problem #3—Letting Small Losses Turn into Big Losses

As I just mentioned, trading stocks is a probability game. You will not be right all the time, which means that one of the most important aspects of trading stocks is to never let small losses grow in to big, portfolio debilitating losses. You have to limit losses at a risk level if you are going to be successful over the long run.

Solution

The simplest and, I think, most effective solution for most people is to set a stop loss point before purchasing a stock and apply it immediately after purchasing a stock. Use basic chart analysis to determine where the market will have proven your decision to enter a trade wrong and set your stop just below that. Automated stop losses are best because they do not require you to have the discipline to pull the exit button. Do not change your stop once you are in the trade. Making the stop loss judgment before you enter the trade is best, since you will not have an emotional attachment to the stock at that point, since you have not put your money on the line yet.

NEXT PAGE: The Market Giveth and the Market Taketh Away

Trading Problem #4—Trading Low Probability Opportunities

My dad is one of those do it yourself guys who would rather work hard than have someone else do the job for him. As a kid growing up, that meant that I helped build fences, garages, and basement developments, pour concrete driveways, do yard work, and generally learn that same ethic to work hard. I am thankful that I have that spirit but, in the early stages of being a trader, it was something that hurt me. The stock market can not be made to go your way by hard work. There are times when the market giveth and there are times when the market taketh away. The legendary Vancouver stock promoter Murray Pezim once said that all abnormal profits in the stock market are just short-term loans. His point is that people do not know when to leave the market alone and when it is time to work hard. Traders will tend to take low probability trading opportunities at the worst time because it is during weak market conditions that the market only shows marginal opportunities. By working really hard, traders can find opportunities that are pretty good, but not great. By taking these lower probability trades, the trader sets him or herself up for failure, since their rate of success will not be as good.

The Solution

I have said it many times, when the going gets tough, tough traders get lazy. You must always be picky about the kind of trades you make, particularly when the market is weak. Working hard to find opportunities will not make you more money, working hard at being disciplined will. Teach yourself to look forward to the slow times. Make a list of things that you are going to do when the market slows down. Plant a tree, play golf, kill the ants that are crawling around your house. Just make the list. Perhaps most importantly, if you depend on the market for a paycheck, make sure that you bank money when the market is good so that you don’t have to trade when the market slows down. Making a trade because you need to pay some bills is not a good way to trade.

Trading Problem #5—Overtrading

There are stock traders who make 150 or more trades in a single day. I am not sure they make a lot of money. I firmly believe that you can make more money by making fewer trades because it will make you focus on only the best of opportunities and play them with a larger amount of capital so the payoff is better. By being patient and disciplined with the really high probability trades, you can maximize profitability.

The Solution

If you are currently making 50 trades a week, tell yourself that next week you will only be allowed to make ten. If you are making 20 a week, promise yourself that you can only make five. Don’t just tell yourself that you are going to stick to your new rule, write it down. By setting this limit, you will hopefully change your outlook and try harder to only consider very high probability trades. We want to focus on great trading opportunities, not just those that are good.

NEXT PAGE: Don’t Count Your Money When You’re Sitting at the Table…

Trading Problem #6—Hesitation

You are watching a stock that has all the signals you look for in an opportunity. The proper point to enter comes, but you wait. You second guess the opportunity and don’t buy the stock. Or, you bid for the stock at a price that is not likely to get filled if the opportunity does pan out the way you anticipate it will. As a result, you get left behind while the market pushes the stock higher. A short while after the initial entry signal, when the stock has made a decent gain, you decide to finally enter the trade. After all, the market has proven your analysis correct, so you must be smart, and right. Not long after you enter, the stock turns south and you end up with a losing trade. If only you had bought when you first thought about it.

The Solution

This is really just a confidence issue. You are either not confident in your ability to analyze stocks, or you are not confident in the methodology that you are using to pick trades. Therefore, you have to research your method so that you have the confidence that it works. Then, you have to start small, making trades that have a potential loss that you are comfortable with. As you gain confidence in your method and your ability, increase the trade size. With your new found confidence, stand in a crowded room and scream, “I am great!” Well, maybe don’t carry it that far.

Trading Problem #7—Letting Winners Turn into Losers

The final trading problem that I want to focus on is allowing winning trades to turn into losers. Many of us have probably had a time when a trade was making big loot and we started to count the profits like they were ours before we exited the trade. When the stock started to lose the ground it had gained, we avoided selling because we had built up an emotional attachment to the paper profits we had seen. Instead of selling the stock to lock in some gain, we opted to hold out for the stock to go back to where it used to be, promising to sell when it came back to the point where we felt good about the trade. The stock drifts lower and eventually the gain turns in to a loss. We ultimately sell it at the bottom, swearing never to do it again. But without some reprogramming, we probably will.

The Solution

Like Kenny Rogers used to sing, “Don’t count your money when you are sitting at the table, there will be time enough for counting when the dealing’s done.” Do not calculate your profits before you lock them in. Avoiding the profit watch will help you avoid an emotional attachment to the paper profits, giving you greater clarity to take the exit door when the market tells you it is time to do so.

I hope this outline of mental problems and some solutions helps you become a better trader. The difference between those who succeed in trading and those who fail is not the system they play but how well they play it. Your mind is a powerful thing, don’t let it beat you in the market.

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