“If you are serious about trading, I strongly recommend that you spend as much time examining your emotions while you are in a trade as you do your charts before you place one.”
“Success in trading comes from the consistent application of a proven methodology. If you don’t define your methodology, then your trading style could change with each new issue of Stocks and Commodities magazine. Trying a variety of analytical techniques rather than consistently following one is a problem for traders, and it’s also a great way to lose your trading account.”
–Jeffrey Kennedy, who has more than 20 years of experience as an Elliottician and trader.
Jeff trades with the trend, and specifically likes to “buy pullbacks in uptrends and sell bounces in downtrends” [for something similar, see How to Day Trade the Forex Market]. He prefers a three to five-day time frame. And he keeps his emotions in check, avoiding what he calls the “Lottery Syndrome,” the too-common bad habit among traders who let reasonable profits slip away by pursuing the statistically elusive jackpot.
Can you define your own trading style as easily, or do you continue to struggle with major pitfalls from Jeff’s list below?
1. Inability to Admit Failure
Have you ever held on to a losing position, because you ‘felt’ that the market was going to come back in your favor? This behavior is the ‘Inability to Admit Failure.’ No one likes being wrong, and for traders, being wrong usually costs money. What I find interesting is that many of us would rather lose money than admit failure. I now know that being wrong is much less expensive than being hopeful.
[For more on this topic, see Dealing with Loss Aversion.]
2. Fear of Missing the Party
This one is responsible for more losing trades than any other. Besides encouraging overtrading, this pitfall also causes you to get in too early. How many of us have gone short after a five-wave rally just to watch wave five extend?
The solution is to use a time filter, which is a fancy way of saying, wait a few bars before you start to dance. If a trade is worth taking, waiting for prices to confirm your analysis will not affect your profit that much.
3. System Junkie
My own biggest, baddest emotional monster was being the ‘System Junkie.’ Early in my career, I believed that I could make my millions if I had just the right system. I bought every newsletter, book, and tape series that I could find. None of them worked.
I even went as far as becoming a professional analyst – guaranteed success, or so I thought. Well, it didn’t guarantee anything really. Analysis and trading are two separate skills; one is a skill of observation, the other is a skill of emotional control. Being an expert auto mechanic does not mean you can drive like an expert, much less win the Daytona 500.
By Jeffrey Kennedy, Elliott Wave International
14 Critical Lessons Every Trader Should Know
Since 1999, Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. Now you can get “the best of the best” in these 14 lessons that offer the most critical information every trader should know.