Top 4 Mistakes Good Traders Make & How to Avoid Them

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Updated: 04 March 2020

Overcome These Costly Mistakes & You’ll Give Yourself The Greatest Chance in Achieving Your Trading Goals

Successful trading requires a good deal of discipline, the right mental attitude and ability to be crystal clear on the outcomes you are looking to achieve.

Today I wanted to take a look over the Top 4 mistakes good traders make and by that I mean people who have been in the markets for several years and should know better. Even if you have been trading for many years does not make your immune from silly mistakes on your account, so let's take a look over the 4 big ones and see if we can get our thinking right going forward.

1. Unreasonable and over the top Expectations

Fear and greed have been driving the world's economies long before any of us reading this email were born and it's not about to stop anytime soon. Pushing us over the edge are emails galore promising untold riches and wealth and when we head over to Twitter or Facebook we read of the countless updates on how much money their last trade made. Any wonder we sit here thinking that our measly 20-30% returns aren't cutting it.

Stop worrying about others success and focus squarely on what you need to achieve. Start by getting crystal clear on your objectives and uncovering what a successful year would mean to you given your financial circumstance, previous trading history and ability to allocate time to your trading career.

Your mind has this incredible tool called the reticular activating system (RAS) and there is immense power in writing down your daily, weekly and monthly goals, especially when it comes to trading. Start to get real and focus on your specific targets and remove all the other clutter that is bouncing around in your head.

2. Not creating a trading plan and sticking to it

Once you have carved out your crystal clear trading objectives, it’s time to create and document the trading plans that are going to help you achieve said objectives.

To be specific, your trading plan will need to clearly document the following:

  • Which market(s) you are going to focus on
  • A clear cut entry signal (long and short)
  • An exit strategy which includes a loss exit and a profit exit (profit target and or trailing stops)
  • A sensible and effective risk management technique

Other items not often thought about include:

  • Contingency plans if your internet drops out or your PC/laptop/mobile device/tablet stops working
  • How to overcome trading distractions. i.e. friends staying for a week, family events, holidays etc

Ideally your trading plan is clear enough that a 10 year old could read and understand what you are talking about. Keep it simple and effective and then back test it over a reasonable time frame. If you are testing electronically, then stick it through 10 years worth of data. If manually, isolate trending, range bound and volatile markets and try to manually test with 200 samples of each market type.

Your goal now is to ensure you can test the system in real time with live funds with a relatively small amount of risk and prove the system works and that you didn't curve fit it on historical data. At a minimum you need to commit to the next 20-30 occurrences of your edge (as Mark Douglas would indicate) to ensure you have a winning streak, losing streak and everything in between.

3. Trading at too high a level of leverage

Excessive leverage can be the death to any account and is a double edged sword. Leverage means your small outlay (margin) is accessing much larger positions. For example, your $10,000 account might be trading $200,000 worth of AUDUSD or EURUSD. That is 20 times leverage and is way too high. Sure the wins might be big but the losses are equally big and as Marcel Link rightly points out, Preserve Precious Capital (PPC) should be your number 1 motto. Ignore this advice at your own peril.

Instead, focus on committing to your trading plan and achieving your objectives through low levels of leverage. Stay in the game and give your trading system a chance to realise it's (hopefully) positive expectancy (edge). Trust that compound interest (considered the 8th wonder of the world by Albert Einstein) is going to work in your favour and your 15-30% yearly returns are definitely heading in the right direction.

4. No Trading Journal

Are you looking for the number 1 trading book ever written? Unbeknownst to many, the best trading book ever written is your very own trading journal. Capture your thoughts prior, during and after a trade and you'll have in front of you the very best snap shot of everything that is going on in your trading. Reviewing your trades at the end of the week or month can be quite an eye opener and will definitely assist in making you a more accomplished and confident trader.

In addition to a trading journal you should record your trading statistics and plot your equity curve. You'll settle for no less from a fund manager so why not expect that of yourself. Sometimes you have to put tough love to work!

Other numbers you'll want to record are your average win, average loss, % win, % loss and something than Van Tharp talks about a lot and that is your R multiples. R stands for Risk and your R multiple allows you to record everything in terms of your risk. If you risk $400 on every trade then 1R = $400. If you have a $1,200 win, then you just had a 3R win. Grab Van Tharp's book Trade Your Way to Financial Freedom to learn more about this concept as it is an extremely useful metric to record and will allow you to identify whether or not you have an edge (positive expectancy) by calculating your average R multiple.

Well there you have it. We've outlined 4 critical mistakes good traders make and now it is your turn to mentally check off if you are making any of these and then take positive action and work to fix them.

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