I have done this a long time, and it took me a long time to become confident that I can trade for a living. In my career which has given me the opportunity to live and work in the different financial centers around the world – London, New York, Singapore, Hong Kong and Seoul – I have had the opportunity to meet, work with and learn from some of the best traders in the world.
One of the most interesting things I have noticed is that regardless of where, and when, traders of all creed and experience make the same few mistakes. If you have been trading for a while, it is almost a certainty that you would have made some, if not all, of these mistakes.
The first step to becoming better is to understand what are the mistakes that a trader will inevitably fall prey to. So, what are the common pitfalls you must avoid?
Making money is not difficult but losing money is infinitely easier.
If you have been trading a while, and you are not rich beyond your wildest dreams, but you haven’t yet given up, you will be very familiar with this.
You keep trading because you have experienced days of profits and spurts of intermittent success. Unfortunately, all these strings of gains invariably end with a few days of huge losses, which may even end up crippling your bankroll. You will then regroup, put in more capital after convincing yourself it is just bad luck, and repeat the process. Rinse and repeat until you get worn down and give up or you wake up to the fact that there is a better way to do this.
To succeed, you need a process to stop yourself from suffering those few days of crippling losses.
Don’t take my word for it. Almost every trading legend or market wizard, when interviewed about the secrets of their success, will tell you a story about how they almost bankrupted themselves which led them to resolve to implement a process that will stop them from repeating this same mistake ever again.
“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”
– Paul Tudor Jones
Overtrading. Sometimes the best trade is to have no trades.
Being market neutral is also a market view. You can’t expect to have an idea of where the market is going ALL the time. Don’t expect this of yourself and don’t try to be a hero.
It is okay to have no positions and to take a step back till a clearer picture emerges and a better risk vs reward opportunity arises.
Thinking that you can make money in all market conditions.
If I were to come to you to sell you a black box with a secret trading algorithm and if you have any sense at all, you will ask me a set of questions similar to the following
- In what market conditions does it work best?
- In what market conditions does it stop to work or even lose money?
- Where is the failsafe switch where it knows when to stop trading?
Yet, of the many traders whom I have met – both professional and the retail variety – very few of them actually ask these questions of themselves. They expect to make money come rain or shine, in
bear and bull markets, in volatile and quiet markets, in trending markets as well as range-bound
markets. They expect to make money every day that the market is open regardless of their health
and their mental state. They expect not to have to switch themselves off when they are, after all,
human. Is that a rational expectation to have of yourself? If Djokovic tells you he can win every single tennis match that he plays on every surface, week in and week out, all year round, would you think he’s gone crazy?
Do you make these mistakes? If you do, and realise that you do, then you are ready to change for the better and become better.