The Top 10 Trading Mistakes and How To Avoid Them

The Top 10 Trading Mistakes and How To Avoid Them

Author: Jim Wyckoff

Achieving success in futures trading requires avoiding numerous pitfalls as much, or more, than it does seeking out and executing winning trades. In fact, most professional traders will tell you that it's not any specific trading methodologies that make traders successful, but instead it's the overall rules to which those traders strictly adhere that keep them "in the game" long enough to achieve success.

Following are 10 of the more prevalent mistakes I believe traders make in futures trading.

This list is in no particular order of importance.

1. Failure to have a trading plan in place before a trade is executed.

A trader with no specific plan of action in place upon entry into a futures trade does not know, among other things, when or where he or she will exit the trade, or about how much money may be made or lost. Traders with no pre-determined trading plan are flying by the seat of their pants, and that's usually a recipe for a "crash and burn."

2. Inadequate trading assets or improper money management.

It does not take a fortune to trade futures markets with success. Traders with less than $5,000 in their trading accounts can and do trade futures successfully. And, traders with $50,000 or more in their trading accounts can and do lose it all in a heartbeat. Part of trading success boils down to proper money management and not gunning for those highly risky "home-run" type trades that involve too much trading capital at one time.

3. Expectations that are too high, too soon.

Beginning futures traders that expect to quit their "day job" and make a good living trading futures in their first few years of trading are usually disappointed. You don't become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance to achieve success in any field of endeavor -- and trading futures is no different. Futures trading is not the easy, "get-rich-quick" scheme that a few unsavory characters make it out to be.

4. Failure to use protective stops.

Using protective buy stops or sell stops upon entering a trade provide a trader with a good idea of about how much money he or she is risking on that particular trade, should it turn out to be a loser. Protective stops are a good money-management tool, but are not perfect. There are no perfect money-management tools in futures trading.

5. Lack of "patience" and "discipline."

While these two virtues are over-worked and very often mentioned when determining what unsuccessful traders lack, not many will argue with their merits.

Indeed. Don't trade just for the sake of trading or just because you haven't traded for a while. Let those very good trading "set-ups" come to you, and then act upon them in a prudent way. The market will do what the market wants to do -- and nobody can force the market's hand.

6. Trading against the trend--or trying to pick tops and bottoms in markets.

It's human nature to want to buy low and sell high (or sell high and buy low for short-side traders). Unfortunately, that's not at all a proven means of making profits in futures trading. Top pickers and bottom-pickers usually are trading against the trend, which is a major mistake.

7. Letting losing positions ride too long.

Most successful traders will not sit on a losing position very long at all. They'll set a tight protective stop, and if it's hit they'll take their losses (usually minimal) and then move on to the next potential trading set up. Traders who sit on a losing trade, "hoping" that the market will soon turn around in their favor, are usually doomed.

8. "Over-trading."

Trading too many markets at one time is a mistake -- especially if you are racking up losses. If trading losses are piling up, it's time to cut back on trading, even though there is the temptation to make more trades to recover the recently lost trading assets. It takes keen focus and concentration to be a successful futures trader. Having "too many irons in the fire" at one time is a mistake.

9. Failure to accept complete responsibility for your own actions.

When you have a losing trade or are in a losing streak, don't blame your broker or someone else. You are the one who is responsible for your own success or failure in trading. You make the trading decisions. If you feel you are not in firm control of your own trading, then why do you feel that way? You should make immediate changes that put you in firm control of your own trading destiny.

10. Not getting a bigger-picture perspective on a market.

One can look at a daily bar chart and get a shorter-term perspective on a market trend. But a look at the longer-term weekly or monthly chart for that same market can reveal a completely different perspective. It is prudent to examine longer-term charts, for that bigger-picture perspective, when contemplating a trade.

By Jim Wyckoff
www.jimwycokff.com

Behavioral Patterns That Sabotage Traders

Author: Brett Steenbarger

Although I do not maintain a private practice of counseling/coaching for traders, it is perhaps inevitable that traders would contact me for assistance after reading my book on The Psychology of Trading . Once in a while I take on a project of working with a group of traders because of the opportunity to push the envelope and use psychology to improve their trading performance. In the past few years, I would guesstimate that I have gathered personality questionnaire data and assisted over one hundred traders.

That's a decent-sized sample, and provides me with worthwhile insights into the minds of traders and the problem patterns that interfere with their trading. Below I outline a few of the things I have learned from questionnaires and interviews with individuals who are trading for a living.

• Most trading problems are varieties of performance anxiety. Performance anxiety occurs when a performance that is usually automatic becomes the object of excessive scrutiny. This attention to the performance creates an interference effect, in which the performance can no longer flow naturally. Such performance anxiety frequently interferes with athletic performance, public speaking, sexual performance, and test taking. Whenever fears about the outcome of a performance dominate the performance, outcomes are apt to suffer.

• Performance anxiety occurs as much during times of market success as during times of market loss . It is not at all unusual to find traders who are good at taking (appropriate) losses, but who become fearful when they book a gain and take profits prematurely (i.e., prior to reaching their profit targets). Interference effects following strings of losses are no more debilitating than interference effects from pressure that traders feel when they are making money.

• Traders commonly try to replace negative self-talk with positive self-talk during trading . This is a mistake. When traders are immersed in the market and focused on the screen, they are not engaging in self-talk at all.

• Perfectionism is the most common source of performance anxiety among traders . Traders tend to be achievement-oriented and often set lofty goals for themselves. These performance goals contribute to tension when the goals are not met. In general, it makes sense to replace performance goals with process goals. Instead of setting a goal of making $250,000 a year, a trader should, for example, set a goal of following a trading plan (entries, position sizes, exits) on 90+% of all occasions.

• Perfectionism leads traders to overtrade . Overtrading is the most common source of losses among the traders I've interviewed. Traders overtrade when they feel internal pressures to make money that blind the trader to what is happening in the markets at the time. Trading when volatility is low, trading outside one's trading plan or strengths, trading to make up a loss, and trading imprudently large size are examples of overtrading.

• Traders that master performance anxiety at one level of size (e.g., 5 contracts) frequently re-encounter it once they meaningfully increase their size (50 contracts). We generally calibrate our emotions by the dollar amounts we make or lose. This makes a fifty contract trade much more difficult for traders than a five contract trade, even though the setups may be identical.

• Traders often think they have worse psychological problems than they actually have . When performance anxiety patterns have interfered with trading for a considerable period of time, traders often become convinced that they have deeply-seated emotional problems that need intensive psychotherapy. Often, the self-perception that one is damaged-that one is emotionally unfit-is a larger problem than the performance anxiety itself, which is a very solvable problem.

To be sure, there are problems other than ones related to performance fears that can interfere with trading. Many of these are described in my book. The unique thing about performance anxiety is that it can afflict highly successful traders every bit as much as rookies. This is because the root of much of the anxiety-perfectionism-tends to be present in the most achievement-oriented and successful individuals. It is truly a double-edged sword.

Somewhere between the extremes of performance pressure and complacent laziness is a happy medium where traders can focus on self-improvement without sabotaging their results. Trading is like dating: You want to keep initial expectations reasonable, enjoy it while it's happening, and learn from it once it's over. In the second and final article in this series, I will take a look at strategies traders can use to overcome performance pressures.

Consider the following psychological scenarios:

• A student needs to pass an anatomy course final exam in order to successfully complete his first year in medical school. Because his first several exams were on the borderline between passing and failing, the course grade entirely rides on the final. As the time approaches for the big test, the student finds himself increasingly worried about the test-particularly when he misses questions from his practice exams. The worry interferes with his sleep, which in turn makes him even more concerned that fatigue will prevent him from doing well. By the time he takes the exam, he is tired and nervous and misses many questions, often by second-guessing right answers.

• A young woman has never been particularly uncomfortable in public speaking situations, but now is asked to give the most important presentation of her career. The result of this presentation could spell the difference between landing a major client for her firm vs. losing the client to a competitor. During the talk, she notices that the audience members from the firm she is wooing don't seem especially attentive. This suddenly raises her anxiety, and she desperately tries to spice up the presentation. When she loses her place in the talk, she becomes flustered, and finishes the presentation on a hesitant note.

• A basketball player has been the team's leading scorer, but starts out a game missing his first five shots. The opposing team is double-teaming him, and he is having difficulty breaking free for open looks at the basket. Determined to take matters into his own hands, he decides to penetrate the opposing defense and draw fouls. Instead, he picks up two quick charging calls. Now fearful of being taken out of the game for his fouls, he searches for his shot by moving a little further out on the perimeter. When these shots don't fall, he stops looking for his shot and throws two errant passes.

• A trader has several winning trades in a row and, feeling confident, increases his size to take advantage of his hot streak. The position initially goes in his favor, but quickly reverses when large orders push the market lower. Forced to puke his position, he realizes he has lost all of the profit from his previous, winning trades. He is driven to regain the money and reenters the market, only to get slammed by a second wave of selling. He now feels like he has entered a cold streak and begins trading hesitantly, with reduced size. By the time the market closes, he is down on the day and the week. He feels like a jerk for becoming overconfident after his gains.

No doubt you can detect a pattern in each of these situations. The individual is in a performance situation where he/she experiences pressure to succeed. The situation has taken on a distinct importance in the person's eyes, and now he/she is focused on the results of the performance-not just the performing itself. This dual focus-worrying or focusing on the outcome of performance while trying to stay immersed in the performance-is the common element behind all performance anxiety. Such anxiety is the single most common trading problem I have encountered in my interviews with traders.

How can traders reduce their level of performance anxiety? Here are a few strategies that I have found to be effective:

1. Focus on process goals when thinking about trading, rather than profits/losses - Traders like to set goals for themselves, yet often as not, monetary goals end up creating unnecessary pressures. More effective goals are ones that focus on the process of trading, such as limiting losses to two ticks if you're a scalper or holding trades until a trailing stop is hit. A nice mindset is, "If I just trade the right way, the profits will come." This takes much of the pressure off the performance.

2. Tackle risk incrementally . Risk places a psychological magnifying glass on situations and greatly increases the opportunities for performance pressure. A foul shot in the first minutes of a basketball game is the same foul shot in the final seconds of a tied contest, but there is a huge psychological difference. Traders who try to radically increase their size quickly find that the trade that worked out with 1 contract may not work with 10, because of pressures to (too) quickly limit losses or take profits. A gradual ramping up of size is far more effective than an impulsive leap for which one is emotionally unprepared.

3. Step away from the screen . The self-talk during periods of performance anxiety actually interferes with the accurate processing of market data, because the part of the brain responsible for perceiving and acting upon market patterns is not being activated. It is far better to step away from the screen and refocus on what the market is giving you than to act blindly on one's fears and compound an already-difficult situation.

4. Use mental rehearsals to make threatening situations familiar . This is perhaps the single most effective technique I have found for reducing and eliminating performance fears. By using guided imagery to repeatedly face threatening situations and mentally rehearse how one would like to respond, one can eliminate much of the stress when those situations actually occur. The goal is to so often face the performance fears in your mind that the coping response becomes automatic, like a habit pattern.

5. Anchor mental rehearsals to distinctive mind states . This is one of the best strategies covered in my book. By learning to place oneself in a state of unusual calm and focus, and then by repeatedly rehearsing coping strategies for threatening situations, a trader can create a link between the mental state and the coping response. When there is a stressful performance situation, all the trader needs to do is invoke the rehearsed mental state and the coping behaviors that have been overlearned will come to the fore. For instance, if you continually mentally rehearse a strategy for holding onto winning trades while sustaining a calm focus, recreating the calm focus during the next winning trade will make it easier to summon the self-talk and behavior associated with holding the position.

6. Perform a mental checklist before trading . Eliminating perfectionistic expectations at the start of the trading day can go a long way toward reducing performance pressures. Any time the word "should" enters one's thinking about trading, it's time to step back. "Shoulds" include internal demands to make a certain amount of money, to trade with a particular frequency, to make back money that has been lost, to not leave money on the table, etc. Because performance anxiety is often fueled by excessive self-demands, setting and affirming reasonable trading goals through the trading day can go a long way toward reducing performance pressures.

7. Get a life . When something becomes all-important, the pressures that accompany performance increase exponentially. Traders who trade for a living and who have little else going on in their lives are especially vulnerable to performance anxiety. If trading is your whole world and trading isn't working, it's going to feel like your world is collapsing. By placing one's self-esteem eggs in many baskets, traders can ensure that the inevitable drawdowns and cold periods will not disrupt their self-confidence.

I cannot emphasize strongly enough: Most traders who are convinced that they have deeply-rooted psychological problems or addictive trading patterns are actually caught in a vicious cycle of perfectionistic self-demands, increasing performance pressure, mounting anxiety, disrupted performance, and renewed self-demands to compensate for the failure. After a while, traders caught in such a cycle begin to doubt whether they will ever succeed. By addressing their problems at the source-the expectations that generate performance pressure-traders can often turn themselves around in a surprisingly short period of time.

Good Articles.

Thanks!

There is only one mistake in trading

Doing Something which You Dont Understand

Every other problem is a derivative of it.



CV

Nice ones,Ivan.......and more easier to access being in this Sub-Forum.Great going and thanx.

Saint

Thanks Ivan.