The 7 Most Expensive Mistakes Spread Traders Make
Maybe I should call this chapter ‘The 7 No-Nos Of Highly Successful Traders’ after that famous self-help book!
These are the mistakes that professional traders do NOT make – making any one of them will almost certainly be very expensive.
Most traders and financial spread betters lose money consistently. There are a number of factors why this happens. Some are psychological; others are because of poor analysis, while others still are due to money management issues. Many of the reasons that regular losses occur can be boiled down to one factor; traders and spread betters over-complicate things.
From having any number of criteria for entry and exits to following too much press coverage and newsletter writers. Traders are endlessly ‘drunk’ on the opinions of apparently expert analysts. A stock or index can only do one of two things go up or go down yet there seem to be endless ways for us to lose our money.
One of my own biggest hurdles when learning to become a better trader was overcoming the distraction of all the misinformation in cyberspace. Just about everybody and their dog has an opinion on where the market is headed. Comforting as it is to get a general consensus of current sentiment it is not good to go overboard.
Too much opinion does nothing but distract from the job at hand, which is to follow a trading system. Whether it be well meaning economists dazzling with the latest GDP projections; brokers constantly bullish in order to create commissions, newsletters writers aiming for increased subscriptions or merely news reporters giving their two pennies worth too much noise is bad for concentration.
A good trader does not even have to know where the market is headed. The best spread betters don’t care where the market is going provided it goes somewhere. When I learned that I did not have to know which way the market was moving ahead of time it helped my trading immensely.
Things to avoid for me: I personally avoid any ‘guru’ who uses even a whiff of Elliot Wave analysis. Elliot Wave is complicated and is far far from an exact science. Most of these guys could not trade their way out of a paper bag. And there is never a consensus among them as to what wave the market is currently in.
Now you have got this far, I hope you are training your mind into using some good habits, some of them being counter-intuitive (and possibly hard to take on board, I know). You have seen how building a simple trading strategy that is right for your personality can give you an edge. You have also seen that many myths we take for granted are simply not true. Also, you know that economic forecasting is not the same as market forecasting.
‘Every winner needs to master three essential components of trading: a sound individual psychology, a logical trading system, and a good money management plan. This is the Holy Trinity of Trading’ – Alexander Elder, ‘Trading For A Living’.
But before we enter the realm of a professional trader, we must make sure we do not fall into traps that many traders succumb to – with disastrous results.
- Mistake 1 – Not developing a trading strategy that is right for you. Or maybe chopping and changing impulsively between one system and another (or no system at all). Trading on hunches, or tips, or heaven forbid, after reading an article or book, are a no-no.
- Mistake 2 – Not Having A Profit Plan. How much profit do you want to make per quarter and per year? Depending on your chosen strategy, it should be possible to make 25% plus per quarter with drawdowns no greater than 10-15%. Your drawdown is the maximum loss at any time measured from your maximum account valuation. For smaller accounts, these figures will need to be modified. By comparing your actual performance, you can judge how successful your strategy has been. You can then make decisions about any changes.
- Mistake 3 – Overtrading. This is carrying too many trades at the same time and churning them to try to maximise profits. Just keep your trades within your set risk level. Do not be tempted into trading when a new situation that looks promising suddenly pops up – if you have your quota of positions working. Stay with your strategy – don’t be tempted to deviate.
- Mistake 4 – Poor Money Management. Putting too large a bet on one trade, and placing your protective stop too far away so that you break your 3% Rule (see Chapter 4). Always, always, before you place that bet, work out your potential maximum loss to your stop in money terms and calculate its percent of your account size. It takes only seconds – and could save your trading life.
- Mistake 5 – Don’t Get Married To A Position. By that I mean, don’t convince yourself that this is the greatest trade ever and is guaranteed to give you a big lottery-sized win – it just has to. Stay humble at all times, and let the market tell you if you have a winner or not. The market and your spread betting firm will certainly tell you. Also, don’t become more bullish if you are long and the market is going up. The general public (and most media commentators make this simple mistake). Professionals become more bearish in these situations – simply because you are getting closer to a top (but always letting the market do the talking).
- Mistake 6 – Being Depressed At A Loss. Yes, I know taking a loss is no fun, but an over-emotional reaction is counter-productive and may well prevent you from ‘pulling the trigger’ on the next good set-up. Similarly, don’t get too excited when taking a profit. This is a business, and you need your emotional energy for searching out the next profitable trades.
- Mistake 7 – Zigging While The Market Is Zagging. I think you know what I mean! We have all been there – believing the market is in a good rally, only to see it resume its bear market downwards. Using Elliott Waves and sentiment indicators as I described can keep you aligned to the right direction in most cases. But, as always, there are no guarantees that we have it figured out correctly, and that is what protective stops are for.
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