August 6, 2014
In trading, you can often become your own worst obstacle by usually the following three things:
1. Forcing trades and taking trades that aren’t there.
2. Trading too frequently and only semi-decent set-ups that don’t fulfill the criteria of factors you have set for yourself.
3. Investing too much money on any given trade.
4. Letting your emotions run amok due to the poor trading results that are derived from points 1-3.
Beginning traders often have all four going against them and this is why the results are almost always so uniformly terrible among this trading contingent. It’s like feeding yourself to the wolves. And all of this is certainly preventable if you maintain the discipline in order to avoid these errors and mistakes. If you can manage to do so, you will immediately put yourself in a very high percentile among all traders.
As we all know by this point, the fatality rate in trading is extremely high and it’s mostly because it’s so difficult to obtain the discipline required to follow a trading plan (your strategy and rules about entering a trade (and exiting in some forms of trading, like forex), your money management, when you trade, what timeframe(s), and so forth). Trading can be a very counterintuitive endeavor for the brain because we tend to become so emotionally involved in scenarios where the future in unknown. Obviously, it’s important to avoid this type of mindset, otherwise having long-term trading success is basically untenable.
The brain also has a difficult time with probabilities – which are basically what the trading game is all about, as nothing is ever a bonafide certainty. Even a weather forecast that asserts that there is a 30% chance of rain can become very misconstrued. Some people think that this means that it will rain for 30% of the time during the day, or if you step out into the outdoors ten times that day, it will probably be raining on three occasions. No, it simply means that there is a 30% chance that it will rain on that particular calendar day, or whatever the specified time period happens to be. But again, the human brain has a difficult time with the probabilities – that are also very inherent to trading – and much prefers to ascertain some type of concrete interpretation of things, even if it means missing the boat entirely.
Below is a list of ways on how to essentially avoid becoming your worst enemy when it comes to your trading. There’s the old sports analogy that says that winning is a habit, but so is losing. Following these rules as a matter of habit will easily put yourself in a tier clearly above that of the average trader, who unfortunately gets nothing out of his trading career.
1.Manage your risk
Focus on becoming a good trader rather than how much money you’re making. I never found it productive to constantly monitor my account balance. I just simply don’t even look at it. Focusing on becoming a good trader is what leads to eventual profits on a pretty consistent basis.
2. Dampen your expectations
Many people dream that trading will be the one thing that allows them to quit their 9-5 day job and get them on the right track to living a comfortable lifestyle for themselves. But the truth of the matter is that for most, trading will only be a part-time occupation. And even for those traders who do make trading their livelihood, it is often part of a company whose funds you trade with, while making a pretty standard working salary.
The ideation of tooling around in expensive sports cars, living in a gated community on the ocean in a warm-weather location, or whatever the perfect lifestyle might entail from trading your own money is fine to dream about. But things need to be kept in a realistic perspective. Because trading is a really tough profession to excel at. Make sure that you enjoy trading first of all and think of it almost like a hobby of sorts, and as a means of supplementing your income.
The truth is that with trading, whether you make money depends fully on the quality of your trading results. If things don’t go in your favor, which will happen, it often leads to drastic measures to rectify matters, which in turn leads to even worse results. It can be a scary way to live, not guaranteed a cent, unlike a standard job. Trading should initially be viewed as a way to hopefully supplement your regular salary if you are successful in some form, not to replace your job altogether.
3. Stick to your strategy and trade what comes to you
Plan trades out ahead of time. If you receive the proper signals to enter a trade, take it. If not, stay out. Always specify a price ahead of time that you’d like to get in at. This helps in holding yourself accountable and avoiding the psychological issues of taking subpar set-ups or not being able to pull the trigger, which is another common issue.
4. Don’t use the “close early” feature that some platforms feature
Some brokers allow you to close a trade early. This is put in place as an option for traders at some brokers for the reason that if a trade looks like it’s going against you, or you’re winning a trade and would prefer to earn some profit, lest it come back against you and you get nothing. But you need to trust the set-ups that you take and stick by them if you’re trading with a solid strategy/system as you should be. More often than not, you will actually lose money. Even if a trade looks really against you, this early close-out feature will often be offering you just pennies anyway. Even if you’re at break-even so far, the feature won’t even return your initial investment. It’s slanted in favor of the house, to use gambling terms.
Plus, you really don’t know what the market will do. If you have a particular strategy or way of thinking about the markets that is net profitable overall – like the one I write about and demonstrate in my blog – then you do have an advantage over the market. It’s best to let trades transpire as you initially intended or else you are simply undermining your ability to win trades and make a profit.
5. Stick with a timeframe relevant to your trading
For binary options that provide 5-20 minute expiries, sticking with a five-minute chart is best. Every so often you may wish to look at what’s going on at a smaller time compression, but more or less, for expiry times in this range, you want to stick with a five-minute chart. If you trade one-hour expiries, a fifteen-minute chart might be best, for example.
6. The necessity of trading real money in some form
I do believe in demo accounts when starting out and to test trading strategies, but I do firmly believe that at some point investing real money is essential. As always, I recommend never investing more than 1% of the total amount you can afford to lose to your trading endeavors for the sake of avoiding huge ebbs and flows in the account balance and the resultant emotions that stem from them. And these are bad in both cases – greed and euphoria in cases of positive trading results and frustration and a desire to make back this lost profit when things aren’t going well. Emotions will rip apart a trading account like nothing else.
So while demo accounts do certainly have their place, you don’t experience the emotions that can come with trading real money. In a demo account, if you’re attempting to simulate a trading scenario involving real money and you incur poor trading results, you tend to have a carefree attitude and can be almost apathetic given there’s no money of your own at stake. I believe with demo accounts, you don’t truly simulate a live trading experience in this way and may not have the type of focus and standards toward your trading as you might when real money is at stake.
So my suggestion for all traders when starting out and believe they have a solid working strategy in place – which ideally will have been confirmed through some testing on a demo account first – is to trade small. I mean real small – $1 trades, $5 trades, whatever the size might be according to what you can afford to lose. For those who can realistically lose $500 to trading without truly affecting their financial situation, $5 trades are what I would recommend. Many brokers do allow you to invest amounts this small these days.
Often the biggest element mitigating what you can become as a trader is yourself. But as explained, there are ways around this reality. The key really boils down to having a solid trading strategy in place and keeping your money management formed around small investment sizes. This works greatly to reduce trading emotions and help you become the trader that you hope to become.