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.
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.
Join the discussion