My biggest trading mistakes have included letting losses run, not taking profits, hesitating on good trade setups, and being over-eager to trade (overtrading). Here’s how I manage these issues. Hopefully, my experiences will help you as well.
Since I started trading in 2005, I have made a lot of mistakes. Since most people will be able to relate, I wanted to share the biggest mistakes I have made, and that I see others making.
Mistakes happen, especially in an arena as dynamic as trading. There is a lot to process and sometimes the wrong decision will be made.
Losing a trade does not mean a mistake was made. Losses are a natural part of trading. No matter what strategy we are using, it will only win a certain percentage of the time. The rest of the time it will lose. As long as it produces a profit over many trades, that is what matters. Therefore, I’m never upset over a losing trade. What I do get upset about (at myself) is when I don’t follow my strategies.
Win or lose, not following our strategy is a big mistake. But of course, we all know that. So below are some of the biggest issues I have experienced that cause me to deviate my strategies.
Interestingly you will notice that trading presents a bit of a paradox. For example, one mistake is being too eager to trade which cause impulsivity and poor trading decisions, while another mistake is being too hesitant which can result in the really good trades being missed.
The key is to realize these problems are entirely based on context. Impulsivity and over-eagerness tend to occur when there isn’t a good trade setup, but we try to make something happen anyway (doesn’t work). Hesitation occurs when there is a good setup, but we are scared of putting our money on the line.
Interestingly, one state of mind often leads to another. For example, you may hesitate and miss a really good trade. You are mad, and so you become over-eager to get that money back and you start jumping into random quality trades that don’t align with the strategy. After a few losses you feel dejected and lack confidence, and end up missing the next really good trade again.
Now, let’s look at the four biggest trading mistakes I have made, and that I see others making, and how I manage them.
Biggest Trading Mistake: Holding the Loss
The price can move big in our favor, or against us. The mistake I regret the most is not taking a loss when I am supposed to. Before every trade, I know where I will cut my loss. While the occasional loss will come back and produce a profit, the ones that don’t can ruin you.
Through some hard work, I have gotten rid of this problem. I get out when I supposed to get out. In my early years trading, when I looked through all my stats, I found that my worst days were almost always due to one or two oversized losses.
On the trades where I took these big hits, I felt trapped and didn’t want to take the loss. Usually, I was trying to get out, but instead of just doing it I would bid or offer the position out to try to save myself a few cents/pips/ticks. As the price kept moving against me I would move my orders to where the price was, and then keep watching it move against me. Instead of just punching out, I was always scrambling to try to save a few cents. Those few cents I was trying to save have cost me tens of thousands of dollars over the years.
Now, I just get out when I am supposed to.
The use of stop loss orders can aid in this matter. They will execute when (not necessarily where) they are supposed to and get you out. Assuming the trader doesn’t move them…which I sometimes did in my early years.
If you are facing this issue, convince yourself this is a problem you no longer want to have. The distaste for taking a bigger loss than you are allowed must outweigh the “hope” the price will come back in your favor. Whether the price comes back in your favor is irrelevant. If the price hits our loss limit, it is time to get out. Period.
To develop the distaste for taking a big loss, look through your results. If you have a decent method, it should be producing regularly profitable trades. Now, look at all the losses that are much bigger than they should be. If you got out where you were supposed to on those trades, how would your overall profitability differ? It would probably be much better!
In addition, a normal loss shouldn’t affect our psychology too much. We can keep trading and should be able to maintain focus and emotional neutrality. Take a big loss, though, and that can create a domino effect of bad decisions. When you go through charts and historical trades, consider how that one bad trade may have negatively affected other trades that followed.
The end result of this exercise is that you will have an objective dollar figure of what holding onto losing trades is really costing you.
When you add it up and see that just by getting out when you are supposed to your profits would have been increased (or your losses decreased) by $500, $2,000, or $5,000 per month–or whatever your number is–that will help you clearly see how important it is never to let a single trade move past your stop loss level.
With that knowledge, instead of hoping a losing trade will turn around so you can get out flat or make a few bucks, you will know that getting out at the loss is actually putting X number of dollars in your pocket!
When you know that getting out is going to make $2,000 (or whatever your number is) extra on average each month, it becomes a lot easier to accept losses and to never let them get out of hand.
Problematic Trading Mistake: Not Taking Profit
This is not AS big of a problem as not taking losses, but not taking profits when we are supposed to can also dampen performance.
When I trade, I typically use profit targets. Before every trade I have a price set that is both reasonable based on how the asset is moving, and that also more than compensates me for my risk (reward-to-risk must be greater than 1.5:1). Yet, my strategies allow for a bit of leeway. For example, if the price comes extremely close to my target (90% of the way there) but then starts to move away from it, I am supposed to just get out without thinking about it.
The real-world is sometimes more complicated than a simple rule, though. For example, today while day trading I had a $0.30 target on my trade ($0.30 being the difference between the entry price and planned exit price). The price quickly moved to it and touched that price but didn’t fill my order. At that point, I was $0.29 on side. A split second later a big sell order came in and I was only $0.15 onside. I hesitated a second longer and then was only onside $0.02. I got out.
Regardless of whether the price continued to drop or went back up doesn’t really matter. A mistake had already been made. I hesitated and it cost me another $0.13 per share. It doesn’t matter that I was onside $0.29 one second and only $0.15 the next. I have the rule to get out if the price gets close and then moves the other way for a reason: I don’t want a big winner to turn into a loser.
That is my rule, it may not necessarily be yours. My point is that just like taking losses when we are supposed to, we must also take our profits when we are supposed to, according to our strategy.
Hesitation usually kills. If you know you have to get out, it is usually better to do it that second earlier than that second later…because usually by the time you notice you need to get out the price is already moving against you. In the example above, even though it sucked that half my profit disappeared before I could react, it could have made a lot more if I simply didn’t hesitate to get out when I had the chance.
Do what needs to be done. Plan it before the trade happens. While in the trade, rehearse what you will do if different situations unfold.
What are your exit rules on profitable trades? If you just leave your profit target and stop loss alone, and let the price hit them, that is a great method too (this is the method I recommend to all new traders), because you will never have this issue or the one discussed above (assuming you don’t mess with your orders once in a trade). If you do allow some flexibility on when you exit a profitable trade, go through all your trades and see how much more you would have made over the last month if you got out of those trades when you were supposed to.
Just like looking at your losses, you may find that on average you could have made $0.10 more (per share) per day if trading stocks, or 10 pips more per day if day trading forex. That may not seem like a lot, but if trading 2000 shares, that’s $200 day…or about $4,400 per month (22 trading days).
What many traders fail to realize is that the difference between really successful traders and those that lose is small stuff like this. It is finding a few extra pips here or a few extra cents or ticks there. It is all those little improvements which are the difference between winning and losing, and winning big and being mediocre.
Biggest Trading Mistakes: Hesitation on Good Setups
Occasionally, traders will send me a screenshot of their charts to look over…usually on their bad days [please don’t send emails, I can’t respond to them all]. What I notice is that while they did end up in some bad trades, the far worse travesty is that they missed the good ones! Since I always aim to make more money on my winning trades than I lose on my losing trades, missing even one or two winnings trades in a day can mean the difference between having an amazing day or a dismal day, or at least between winning and losing.
For example, let’s say I take three trades and lose 10 pips on each. I am down 30 pips. But, assume I missed two profitable trades. Those trades should have been at least 15 to 20 pips (1.5:1 to 2:1 reward to risk). Taking one of those trades means a greatly reduced loss for the day. Taking both those trades means a likely profit for the day. It still wasn’t a great day, but missing the winners made it far worse.
My worst days are typically the ones where I hesitated and missed the one or two (or maybe three) really good trade setups that occurred. Because I missed those good opportunities, at the end of the day I am only left my losses to show for my couple hours of work.
Missing a good setup is usually about twice as costly (because I am often using a 2:1 reward-to-risk ratio) as a losing trade. In other words, while many traders are scared to lose, I am far more afraid to miss out!
Not hesitating on a good setup comes down to psychology. We need to be confident to place trades, but not arrogant (see being over-eager below). Unfortunately, most of us can’t just decide to be confident. But, we can practice hard, and the more we practice our methods the better we will feel about them. Slowly, over many trades, we will see that if we follow our strategy the money will come. This helps build confidence in the method.
In How to Overcome Trading Anxiety I stated that “Confidence is created by courageous acts–constructive decisions which are made even when a lot of anxiety is present.” Even great traders have moments of doubt or anxiety. We are all human. For whatever reason, we may not want to pull the trigger on that good trade setup, but we have to. Doing so is a courageous act. And it is only through routinely making trades, in spite of our anxiety or apprehension, that we will start to see that those trades will increase our overall profitability.
Just like any other trade, there are no guarantees the trade will work out if we take it. That is why it is a courageous act. But by taking these trades routinely, our results will improve because we will start catching more of those good trades we have been missing.
One of the most courageous things to do is to get back into the same trade after being stopped out. We have all had that experience. The price touches your stop loss and then starts flying in the direction you expected. Here is where psychology comes into play again. If it is still a good trade, we need to get in again! We can’t fret about the loss. It happened, all we can do is capitalize on the opportunity that is still in front of us.
As traders, we need to move from a state of worrying about losing, to an opportunity-seeking mindset. We aren’t worried about past winners or losers, rather we are focused on the now and the opportunities that are arising. If we are always thinking about past trades or that loss that just happened, it is almost impossible to stay in the moment and seize that next great opportunity that occurs a split-second later.
Practice your method enough so that a loss, or a potential loss, doesn’t phase you (because the fear of losing is what usually causes us to hesitate on a good trade). As long as you worry about losing, you will likely miss opportunities. Stay in the moment but remain calm. We are ready to pounce if needed, but only if a good trade setup arises. When no trades are present, we are focused on the market and watching for trade setups. We do this without expectation or apprehension. We simply watch, and wait for the market to come to us (do what we want) before taking action. This way, we are ready to act when the moment comes.
Biggest Trading Mistakes: Being Over-Eager to Trade
We have all heard “Don’t over-trade!” While that is true, hearing that won’t cure your overtrading. That’s because overtrading is a symptom. Overtrading doesn’t cause overtrading, something else does: our mental state. Being over-eager to trade, fantasizing about big profits, or feeling we need to get a certain number of trades in today are mental states that cause us to overtrade. In order to control our overtrading, we need to control our mental state.
I haven’t personally met anyone who has mastered their own mind yet, and I am no exception. I sometimes overtrade. Every once in a while I will have one, two, or sometimes even four or five days in a row where I am just really amped up to trade, and this usually costs me some money. Such stretches typically follow a long string of winning days. Feeling confident, that confidence can sometimes turn into taking trades that aren’t that great (arrogance). We start relying on our own intuition, instead of trusting the strategies that produce the gains.
I have told many students over the years that a good trader is nothing more than a button pusher for their system. The more I implement this theory, getting in and out when my system calls for it (see all points above), the better I tend to trade. When I deviate from this belief, my profits decline.
Being over-eager is often a result of one or several underlying issues.
The most likely cause is that the trader doesn’t really have a solid plan for trading in the first place. Without a plan, every move in price looks like a trading opportunity. Experienced traders know this is not true. If you don’t definitively know when you should be taking trades, figure that out before you trade.
Another cause is the desire to make money. While we can make money trading, unfortunately, we don’t get to determine who much money we make this instant. The market determines that. You can have the best strategy in the world, but it means nothing if the market you are trading isn’t moving right now. The market determines our profit on each trade, and at any moment it can do anything it wants.
We don’t control the market or the opportunities it provides. But, we do control how we react to the market, and can improve our methods so we have a say in how much money we make over many trades. We can study our own reactions to find ways to improve our performance. We can also look at how the market tends to move which may aid us in finding better ways to implement our trades. All this work is done OUTSIDE of our trading time. While we trade, our only goal is to implement our current strategies. To study your reactions to the market, take screenshots of every single trade you take, and then review them regularly.
Many people who over-trade are conducting experiments while they trade: “Let’s see if this works” or “I think I can make a few bucks…I will get out quick if it doesn’t work.” This sort of thinking undermines discipline and patience, two traits which guard us against overtrading.
Related to the section above, about hesitating, over-trading sometimes comes out of frustration from missing a good trade. When we miss a good trade, we try to make that money back by taking random trades and hoping they will work out. This generally leads to more losses, more frustration, and even more random trades as we fumble around hoping to make back some of the money we lost. We can often avoid this domino effect by not hesitating and missing the good trades in the first place (see section above).
Over-trading can also result from “playing with the house’s money”. When we are up for the day/week/month/year, some traders tend to relax their standards for trades. They take mediocre trade setups, or let losses run further than they should. Having made money is not an excuse to overtrade.
Every trade is independent. It is taken or left alone based on its own merits. Past trades don’t affect decisions about current trades (unless you are using a daily stop loss, in which case you want to make sure a loss wouldn’t put you over your daily maximum loss). As discussed above, as traders we are simply button pushers for our system. We calmly wait for the next signal without expectation or apprehension. The insights in this Fixing It section, and the ones above, should aid in getting you there.
As with the other sections, sometimes reducing the mistake to dollar figure can help. Go through your charts and see how much all those random or poor-quality trades cost you each month. Seeing the dollar figure may cure your overtrading right then and there, because you will see that you could make a lot more money by sitting on your hands until the good setups for your strategy occur.
Final Word On the Biggest Trading Mistakes
Once someone has a decent trading method, and assuming they keep risk to 1% or less per trade, the most common trading issues I see and deal with are covered above. These are the big ones. While insights into handling these issues have been offered, all the solutions involve actual work. Reading and conceptualizing won’t cut it.
To reduce these mistakes, if applicable to you, you should actually go through at least a month or two of your trades/screenshots and add up how much your over-sized losses cost you. Do the same for not taking profits when you were supposed to; find the dollar figure. If you hesitate on trades, focus on staying present and consciously forcing yourself to take those trades and sitting through the trade even if it makes you squeamish. There are a number of reasons why people over-trade. Find your root causes, and then formulate a plan for how you will improve the issue.
By Cory Mitchell, CMT
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