Seven Deadly Trading Mistakes

Harvey Walsh

24 Aug, 2006

Earlier in this article, I talked about strategy jumping. A close relative of that particular problem, is strategy morphing. The cycle is very similar indeed. The trader starts trading their plan with all good intentions. Things may or may not go well straight away, but sooner or later as the markets behaviour ebbs and flows with and against the strategy’s strengths and weaknesses, losing trades will inevitably occur.

At this point, the strategy-morpher gets scared. They don’t like to give money back to the market, so they decide to try and modify the system to filter out trades like that last losing one. They begin to add indicators to charts. coming up with new ever more convoluted combinations, furiously testing to see what cuts out the most bad signals whilst leaving in place the good ones. A few times round this loop and their chart starts to resemble something a siezemologist might be more used to seeing than a price chart!

I’m not saying that modifying and testing of new systems and ideas isn’t valid, but when it’s done at the expense of trading an already profitable system, the trader ends up chasing his own tail, and loses out in the long run.

Remember that every strategy will have losing trades. When those losses are within the normal expectations of the system, there is no need to start fiddling. Stick with it and as long as the system has positive expectancy, the law of averages will see you through those drawdown periods and you will make money. Paper trading the system thoroughly beforehand will give you the faith in the setups to be able to do this.

Markets are complicated, but trading them need not be. Simple really is the best policy. A simple system makes for easier to spot entries and exits, a less stressful trading day, and consequently a less stressed and more profitable trader. Almost all of the successful traders I know have found this out the hard way, by trying the complicated route first.

Action: To avoid mistake number six, you actually need to do *less* work. Put in a little effort up front in the planning stages, and then relax and just follow your plan to the letter. Thinking too much can damage your trading, not to mention your stress levels.

Mistake Number Seven — Not Taking Action

For every trader who opens a brokerage account and starts placing trades, there must be a hundred more who had every intention of doing so, but for one reason or another, never actually took that step.

It’s a blindingly obvious statement to make I know, but you cannot make a profit from the markets if you don’t actually start trading them! Why do so many potential traders buy the books, ready the forums, and study the charts, but never actually place a trade? The most common reasons I hear are these:

Fear I’m worried I’m going to lose to much money.

If you trade on a simulator, you can’t lose a penny. Today’s technology makes simulated trading more accessible and more realistic than ever. Having a go risk-free will either give you the confidence to take the next step, or will prove to you that trading really isn’t your thing. Either way, you’ve got nothing to lose by trying.

Time I don’t have time to sit in front of a computer all day learning this stuff. There are stock s and futures markets in every developed country in the world. With the wonder of the internet, we can trade them all. That means that when you have some spare time, there is a market open somewhere. There’s no need to give up the day job to try out trading.

Money I don’t have enough cash to trade with. As trading becomes ever more popular, and brokers try and reach out to bigger audiences, minimum account levels are falling. If you have a few hundred spare dollars (US), you can start trading. Having said that, never trade with money you cannot afford to lose. If losing your starting capital is going to put you on the streets, you really shouldn’t be trading with cash. However, there’s no reason you can’t paper trade while you save up that pot.

No Confidence I don’t think I can do this, it’s not for me. If you really think trading is not your thing, of course there is no point in pursuing it. If however you simply fear that you won’t succeed for whatever reason, then you could be missing out on a great opportunity for nothing. Get yourself some free charts and a free simulator, or even a pen and paper, and have a go. If you don’t try, you’ll never know!

Action: Ultimately, only you can take the next step to becoming a profitable trader. It’s a sad fact that many who read this will never take their trading dream further. But those few that do, will be well on their way to success, profit, and trading freedom.

That’s the end of the Seven Deadly Mistakes. I hope you’ve enjoyed reading it as much as I’ve enjoyed putting it together.