If you actively trade Forex, Futures and/or Stocks, this article will help you avoid making bad mistakes that will destroy your trading account!
WE have ALL been there... "paper trading" a new strategy... looks promising and the moment we try it with real money for the first time... it fails in an epic kind of way. Then we start cherry picking the strategy and we continue to lose. Eventually we toss out what could have been a great strategy and repeat the process with another concept that we come up with... only to lose again.
There are a bunch of other things that all of us have done from time to time to make us want to throw our computer out the nearest window. All of these, at first glance will seem like common sense or things that you heard before but I can almost guarantee that if you have been trading for awhile... you have done ALL of them... and probably to the detriment of your trading account.
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Here are the 5 top reasons why most traders fail:
As we opened up this trading article for you, we showed you a quick example on how people cherry pick. Cherry picking is when you start filtering (usually because of emotions or a recent bad beat) your strategy so much that you are manually and continually picking through which trades your strategy tells you to take. Assuming your strategy is sound, consistent, has proven itself in testing and is a logical solution... don't let emotions dictate how you implement that strategy.
I'm not saying that you stick with it until the ship completely sinks but if it's a solid system that you came up with, give it some reasonable time to work. Perhaps you came in right during the system's draw-down. ALL trading strategies have situations or scenarios that aren't conducive to what you're trying to do. ALL strategies have a draw down element to them.
If you have come up with a promising way to trade the markets... let your system breathe a bit... take most, if not all of the trades it alerts you on (assuming that was what you were supposed to do to begin with) and let it win or fail on its own merits.
Look, for logical reasons that your system can't see... sometimes you gotta pass on a trade. For example, you are about to do an hourly trade on a USD based FOREX pair and a FOMC meeting is about to commence... the risk for that scenario for most is too high but if you're bailing on trades because you're scared or for some other emotional reason... you need to stop that ASAP.
Most traders work in a couple of time frames... anywhere from time periods such as executing daytrades off 5 minute charts to finding trades off weekly or even monthly charts... and everything in between.
Your mom was wrong when she told you that you can be anything that you want to be. Each time frame has it's own nuances. Some time frames like daytrading off 15, 5 or even 1 minute charts requires a certain ability to process information fast, make quick decisions and quickly forget about negative actions that occur. You also need to be OK with watching a monitor all day long and have the focus (and environment) to not be easily distracted while trading.
The longer time frames such as trading off of 8 hour, daily, weekly and monthly charts require patience, wider stops (ie. bigger accounts needed) and the ability to sometimes absorb some pain before seeing the promise land. The longer time-frames also allow the "paralysis through analysis" bug to creep in.
Each time frame has it's unique challenges and required skill set. Just because you want to trade off 5 minute charts and rock out trades all day long doesn't mean you should. Pick the right time frame for your account size, mentality, lifestyle, emotional ability, processing speed, etc.
In our years of trading, training people and such... we have seen where some people who are solid daily chart traders are hopelessly lost in the quicker time frames. Find your time frame or you will be doomed to lose.
Just because you want to daytrade the S&P 500 futures doesn't mean your temperament or mental ability will allow for it. Some markets move quickly... some require large stop losses to be able to withstand the volatility. Some markets require quite a bit of margin money which means you need larger account sizes.
Pick the right market(s) for you. Remember, it's not about what you like per se or want to tell people you trade so you look cool... it's about being consistently profit. If trading Oat Futures off of weekly charts is what you're good at and is the perfect match for you... you need to be trading Oat Futures off weekly charts. It doesn't sound so awesome when you're telling people over a beer but you probably are making more money than they are... while sitting in your underwear in the privacy of your own own home!
Pick more than one market (or symbols) to trade so you have options to choose from... but don't pick so many markets that you are overwhelmed. Everyone's capacity to handle data is different... find your spot. If you just follow 1 or 2 symbols, you will find yourself starved for action from time to time and forcing trades... which is a no-go. Find the right amount of markets where you get enough "action" to satisfy your thirst and yet can follow all of them thoroughly and know them intimately.
A quick note on diversification and how you should be aware of it.
Pay attention to the correlation of your active and current trades... don't trade a bunch of markets that are heavily correlated at the same time. It is relatively true that all the major FOREX markets can, and often do affect each other but instead of just trading the EUR/USD and USD/JPY, which both have a USD based element to it, why not add EUR/GBP or AUD/JPY to the FX symbols that you follow. I'm not saying don't look at the EUR/USD and the USD/JPY... you should... they are very good markets to trade and monitor but realize that due to the USD element of those pairs, they can be correlated. So trade accordingly and be are of it.
I have seen so many times traders think they are diversified by being in for example, long both the EUR/USD and GBP/USD not realizing that a lot of times the same news and often similar technical patterns will affect both in a similar way. It's not much different when people are long the stocks AMZN, GOOG and SPY and think they are diversified... you're not... if something hits the market as a whole, you're gonna get smoked in all 3.
There is no problem with looking at or monitoring correlated markets/symbols... if you find a good setup in a couple of markets that are similar... pick the best setup and go with that one.
This is one of the biggest killers of trader's accounts. I ALWAYS put in stop losses with EVERY trade that I make AT the time I open the trade. The system I trade on allows me to put in a OCO bracket order in when I enter a trade. I then adjust it for the market conditions. So, every trade I put in has a live profit exit order and a live stop loss order.
There is nothing worse in trading then not having a stop loss... the market goes against you... blows past your "mental stop loss" that you had... eventually, you cannot take the "pain" any more... and the moment that you finally get out... guess what happens? The market bounces back into the direction you wanted it to go and you want to cry. What's worse than that? It happens again... but this time you wait even LONGER, remembering that if you just waited a little while more that last time you would have been OK... but this time there is no bounce and you just murdered your account.
ALWAYS, ALWAYS, ALWAYS put in a REAL Stop loss order in... and keep it in. The time to figure out where you should put your stop loss order in and then to actually put it in is not when you're losing money and butthurt about the trade... you should do it BEFORE then, when you're still thinking logically. And don't adjust it due to emotions... only adjust it if it makes logical sense.
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This is probably the most important of all the things talked about in this trading article. If you don't actively manage your trading account properly, you will be a new member of the Trader's Cemetery of lost souls who were killed by the markets.
ONLY trade the markets that you can afford to trade! Some markets are very volatile and require stop sizes that you cannot afford. Don't force it... build up your account until you can trade that market. Some markets have large tick sizes (value wise) or move in big chunks. If the typical loss you may see while trading a market... or the risk needed to trade it equates to an amount of money that will bother you emotionally or keep you up at night... don't trade it... or trade smaller (find a mini version of that market or use less contracts).
If you are trading with money that you cannot afford to lose or the money in the account (or potential profits) will be used to pay your rent/mortgage payment... do NOT trade... wait until you have money that you can afford to lose.
Just because you can trade 3 forex pairs at a time on a $1K account doesn't mean that you should. Set a quantity amount per dollar size and stick to it. For example, say you're only going to trade 1 mini forex pair per $500 in the account... and do just that. Over-trading your account size will eventually catch up to you and whip that butt.
ONLY trade the time frames you have the account size to trade. This goes hand in hand with the above tip of only trading markets you can afford to trade. Trading a daily chart for example will almost always require a wider stop loss than trading off 5 minute charts. If the pain is too much for you to bear due to the risk of the market or the stop loss needed - pass on that market until you can afford it. Trading emotionally or scared will lead to you failing.
Some of the things above seem like common sense but you would be surprised (maybe not) how many people don't follow the common sense "rules" above. Common sense isn't all that common.
There are no guarantees in trading and it can be a wild & risky ride... but following the trading tips (rules) and insight above should make the ride a little less bumpy for you.