1) Thinking that trading is a path to quick, easy money
One of the questions that’s part of the list answered in New Trader FAQs is “How much money can I make trading?” because it’s one that comes up frequently and it reflects the mindset of many coming into the markets. It’s said that 90% or more of new traders fail. I don’t know if that’s the actual number, but it certainly is a high figure and a big part of the reason for that is unreasonable expectations coming in. Trading is promoted to many as an easy way to make lots of money, either indirectly through stories of great success, or directly like in the case of overt forex marketing. While trading success can eventually be reached, it tends to take a lot of hard work and a fair amount of time to reach that point. Those who think they’ll be able to jump right in and have the profits rolling into their account from the start get slapped in the face with reality pretty quickly, and for many it is the end of their trading – whether they’ve lost a lot of money or not. Successful trading is a long-term thing (see Taking the Trading Long-Term View), and many folks just are not prepared for that.

2) Not effectively using demo trading
I will be the first to tell you to get into real money trading as quickly as possible, but taking the time to do proper demo trading is important. There are two purposes to demo trading. The first is to familiarize yourself with the platform you’re using and, if you’re a real newbie, with the basics of prices, P&L, and all that. The second is to work through the trading strategy development process to know that you have a workable methodology you can employ to good effect. Of course demo trading is not the same as live trading, as just about any experienced trader will tell you. If, however, you cannot profit in the demo environment, you don’t have a lot of hope for profitable live trading.

3) Failing to pay attention to detail
Making stupid, simple mistakes will cost you money. Yes, sometimes you mess up an order entry and it works to your advantage. Most of the time, though, when you make a mistake it hurts. I’m talking about totally avoidable mistakes here, like forgetting to put in a stop, or putting in the wrong price for an order, or buying rather than selling. It’s basic attention to detail. There’s really no excuse.

4) Not thinking through your approach to the market
A lot of folks jump right into the market with two feet without taking any time to think through what they’re doing. This is something which hit home with me when my book, The Essentials of Trading, came out. I wrote it for folks just getting into the markets, but found I was hearing also from many who’d been in the market for a while and found they needed to go back and revisit the foundational elements of their trading because they’d been all over the place in their development. They’d bypassed that aspect of things when they got started. By that I mean they didn’t think enough about things like trading timeframe, markets, and personal elements which feed into that what, why, and how they trade.

5) Getting fixated on your win %
New and developing traders spend WAY too much time thinking about the frequency at which they have profitable trades. I’ve written on the subject numerous times before (such as here), so I won’t go off on a long rant. It’s a simple question of whether it’s more important to you to be right or to make money. For some folks the being right (or at least not being wrong) thing is important to them. They probably shouldn’t be traders because trading is about making money. You can have 90% winning trades and lose money just as you could have 10% winning trades and see your account balance growing nicely.

6) Thinking more about rewards than risks
We trade to achieve positive results, to grow our account balance. As such, it’s quite easy to fall into the trap of thinking more about all the pips we can make rather than all the pips we could lose on a given trade. A good trader thinks about both at least equally, and if you listen to some of the elites in the business they indicate a clear focus more on the potential negatives. If you’re thinking to yourself “I prefer to be optimistic” then you’re being naïve. Trading first and foremost is about making sure you don’t expose yourself to the chance of getting taken out of the game because of big losses. After all, you cannot make gains if you can no longer trade. Traders with an “optimistic” mindset have a tendency to take on too much risk.

7) Getting too excited
Whether you are having a good run of success or coming off a bad performance, if you’re chomping at the bit to get into that next trade you need to take a few deep breaths. This sort of excited state can lead to very bad decision-making. I’m talking things like taking trades which don’t meet your system’s criteria, trading too big, or trading more markets than is good for you. Some folks can get away with trading while agitated. Most, of us, though, don’t readily notice how our emotional state feeds into our trading choices. Brett Steenbarger has written some good stuff on the subject.

Now, I’m sure others will have their own thoughts on the seven deadly sins of forex trading. What about you? What’s your list?

Live Trading Performance Not Matching Demo Trading Success

Over Two Years Trading and Nothing But Losses

How do you Define Trading Success?

Understand from Where Expert Opinions Come

Treat the Disease, Not the Symptoms

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

Bookmark to:

Brett is not taking the blog down all together, though. It remains up as an on-going resource on the subject of trading psychology. If you’ve never been there, I encourage you to visit http://traderfeed.blogspot.com/

The Trader’s Wish List – First Installment

Brett Steenbarger’s New Book Project

Excellent New Book from the SFO Magazine Publishers

New Trader FAQ Coming Together Nicely

Catching up after a bad long weekend

The Essentials of Trading - Information and resources for those looking to learn about trading and the markets

Bookmark to:

The most important symptom to look for when deciding whether you are system chasing or merely trading a perfectly legitimate alternative method is a lack of profitability. If you are profitable in your current trading and can approach the market with consistency, then trading with a different method is a perfectly legitimate way of diversifying your trading arsenal, and improving your trading skills.

If on the other hand you are trading a new system because you have experienced a few losing trades with your last system and have lost money overall  as a result, this is a key signal that you are becoming a system chasing trader. In the advanced course i suggest a few techniques to make sure that you can avoid this habit, and also to test that your system is going to be profitable in the long run etc…

Id really like to hear from you if you have been struggling with system chasing, and id also love to hear if / how you have managed to overcome this dangerous trap!

We came to the conclusion that certain currencies should start to show signs of strength over the next few months. Later on he explained to me which trades he was looking at taking. To my surprise he was basing most of that decision on the previous conversation that we had, and not price action or technical analysis. From what I could see in the price action the market was almost certainly not going the way that we had talked about, and it made me realise that he was perhaps basing his trades on what he thought the market should be doing, rather than what it actually was doing.

I mentioned this to him and he said that I was right, and that he hadn’t consiously set out to do that, but looking at it objectively he was trying to trade what he thought rather than what he saw. Needless to say that those trades of his didn’t work out, but fortunately he didn’t take them!

This illustrated to me how easy it is to unconsiously fall into this very dangerous trap in your trading style and how much we all need to keep these lessons reinforced in our mind. Have fallen victim to this tendancy? How did you force yourself out of it, or are you still struggling?

As a professional trader I still get all the urges to system chase and break the rules as much as anyone, but the key is learning how to control those urges.

This week has seen some fantastic set ups in the market, and I have known which way the price would likely move thanks to the powerful tools I have at my disposal, but the problem has been that the price just hasn’t been retracing to the levels that I have been waiting at.

This can cause some people to want to just jump in because they have been right about the overall direction the last 10 times, or even worse some people may even be tempted to enter the market without using a stop loss thinking that the price will come their way in the end.

These urges and acting upon them show a lack of patience and discipline and this is what the market punishes the most.

It’s really important to wait until price is exactly where you want it to be before entering the market.

The best thing you can do is find something else to take your mind off the trade. Read a book, play a game or go for a walk.

Once you have analysed your charts and set the order in with your broker there is nothing more to do until the trade actually triggers.

The question is have you got the patience to wait?

After they have spent a few weeks or months searching the internet however these modest goals are replaced by expectations, thanks to all the hype and rubbish out there, and the difference between a goal and an expectation is vast. For example if your GOAL is to make enough every month to live off, you are less likely to quit your job after 2 months to trade, because no one reaches their goals exactly when they want to, it takes time and patience. If however you EXPECT to make enough to live off, and then you dont, the psychological implications can be powerful and very negative.

Because your trading method failed to meet your expectations you are now much more inclined to give up trading in that way and find a new better method, which of course leads you down the path of system chasing, which is not good! 

The moral here is to set realistic goals for yourself and your trading, but never form any kind of expectation because even professional traders have no guarantees as to the markets next move, so all we can do is set our goals and trade with as many probabilities on our side as possible!

How do you find the battle to avoid forming expectations? Do you struggle to get them out of your mind? Or maybe you have over come this stage and would like to share your tips and methods with others?

My answer was that he should absolutely stop using it if he was starting to feel like that. The problem he had was that he didn’t want to get caught up swapping and changing his exit plan all of the time as that would be a form of system chasing.

Which is correct, but there is a fine balance to be made between system chasing and blindly following something that you don’t like!

There are many ways to exit the market and you should try out these methods whilst you are putting your initial trade plan together to save problems later on.

The key thing to bear in mind is that as soon as you hit upon a strategy that works for you and that you feel comfortable with, you should stick to it no matter what, which of course will be much easier if you are comfortable with it in the first place.

In summary everyone finds different methods or approaches that suit them personally and it is important to realise this, so that you too can quickly find an exact method that you find easy to implement and comfortable sticking with in the long term.

I had analysed my charts for the day just before the London open, and decided that I had found a really nice high probability set up on the GBP/USD, so I placed my buy order in with the broker and waited.

In the preceding 15 minutes I got into a conversation with a couple of students of mine who were asking me what I was going to be trading for that day so I told them about my trade set up.

One of them looked at this trade on his own charts and couldn’t see the same level that I was using for a support, the other one couldn’t see it either, so I decided that I must have an error with my price feed and that the data was somehow corrupted thus giving me a false level of support and I quickly cancelled the buy order with my broker.

Here is what the set up looked like:

As you can see above there is a white line and at the left hand side of the chart you can see an old high which the white line is drawn over. Along with this there is a pink line (central daily Pivot) and a 38% retracement level (yellow line) forming a nice confluence of support.

It was this old high that my students did not have on their charts.

Well you can probably guess what happened after I cancelled my but order!

Here it is below:

If you look at the white line you can see that as the price came down to it the reaction was almost instantaneous! And price raced off up into the profit taking levels which were about 300 pips away!

I did not get too upset because I know that there will be plenty more of these opportunities every single day, but I did think what a great lesson this was for me.

The moral here is to just trust all of the tools that you are using and also your own ability to spot a trade that matches your own plan without allowing outside influences affect the decisions you have already made. Next time I will think long and hard before I cancel my order!

 Some people confuse these adjustments with system chasing which is a huge problem that many traders struggle with. In reality as long as it’s done in the correct way adjusting your system is a fantastic way to get set in your trading.

 The vital thing is that you don’t trade your system live until you have tested it out on 30 trades because by doing this you get to see your system in action over a long period of time and thus you can get a good idea if you are going to be comfortable with it or not.

 Once you are comfortable with it you can begin to go live with your trading plan.

This does not mean that your days of being an independent thinker are over, because on a daily basis you will get scenarios where you will be tempted to follow someone or something against what your own mind or system is telling you to do.

 Make sure that your trade plan is something that you can follow day in day out without question, and then make sure that you test it thoroughly to ensure that it is robust in all market conditions.

If you do this your chances of success are much higher in the long run.