Being in the position that I am in of helping and mentoring other traders, I have pretty much seen everything at this point. You might be surprised to know that are many traders who stumble through the same types of frustrating trading scenarios you have probably found yourself in recently. Today’s lesson is written from experiences that I have had both in helping other traders through their trading struggles and from my own personal trading.
This lesson is going to take a very practical approach to helping you improve your trading; I am going to discuss different trading scenarios that happen to each and every one of us at some point in our trading careers; including myself during my 12 years of trading. Then, instead of just discussing what the problem is, I am going to give you some actionable solutions to fix them…
The “up-all-night” trader
Scenario: You wake up at 2am, check the market and see your trade is negative. You sit there for a while staring at your charts, watching the trade slowly move against you, inching closer to your stop loss. You’re tired and exhausted and so you decide to close the trade out now because you can’t stand the “pain” of seeing it move against you anymore…and you can’t keep your eyes open. You wake up the next day fully expecting to see the market would have hit your stop and continued moving against you. However, you see the exact opposite; you see that right after you closed up your laptop the market started moving back in your favor and actually surged significantly higher and would have a hit your profit target instead of your stop loss! You sit there in amazement at the fact that had you just DONE NOTHING and stayed in bed you would have both profited AND gotten more sleep! Frustrating!
Solution: The root causes of waking up in the middle of the night to “check” on your trades and generally just thinking about them too much (at night or during the day), are risking too much money per trade and trading too frequently. If you find yourself glued to the screen watching your trade tick up and down, you have probably risked an amount of money that stimulates your emotions too much. The goal is to find that dollar amount per trade that does not stimulate the fear of losing what you have risked. Once you find that “sweet spot” for your risk per trade, you should be able to truly “set and forget” your trades and not feel that constant urge to check on them (and probably sabotage them as a result). If you’ve mastered a trading strategy and you’re sticking to it, then you need to trust your analysis and trust the trade setup; second-guessing and doubting your trade after it’s live is something that decreases the longer-term winning percentage of your trading edge.
Not taking profits when you know you should
Scenario: You are up around 2 times your risk on a trade and the market looks like it’s getting exhausted, but you see that open profit and you start making up reasons why the market should keep going in your favor. You leave the trade open only to see it turn against you and then before you know it 50% of your open profit has vanished. You sit up all night staring at the trade as it slowly drifts against you wondering in frustration why you didn’t take the profit when it was staring you in the face!
To demonstrate this scenario let me give you a recent example from my own personal trading:
Late on Thursday of last week, I entered a Gold trade, I bought the market on the back of a nice price action signal that indicated to me a rise in price was imminent. My risk was just over $2,000 and within hours Gold had risen just over $40 an ounce and I was sitting on a profit in excess of $5,000 (1 to 2.5 risk reward).
I mentally noted 3 important factors: 1.The market was at resistance around 1425.00. 2. Gold had made this large rally in the Asian session so the odds of it continuing all through Europe and US sessions were not that great. 3. It was a Friday, and since gold had crashed that week, traders might take profits into the end of the week.
Now despite being up a nice profit, and despite noting all these factors that gold could reverse any moment, I stayed in the trade. Sadly, Gold reversed back to 1395.00 ($30), and I ended up completely mis-managing the trade and the result was that I made just a very small profit after an open profit of 2.5 times my risk was staring me in the face. Even worse, is that this week gold has smashed through 1425 and has rallied up into the 1470′s. !!!
Solution: The lesson here is to either stick to the exact original plan and let the trade run its course completely, OR if you’re up a nice profit and you see real and logical reasons to exit (like I did), simply exit the trade. Even though I have been trading for 12 years, I did NEITHER of the above on that gold trade, I mis-managed a perfectly good trade.
When I make mistakes like this, I go back and completely dissect the problem/incident and work on a solution for the next time it happens. It’s important that I have recognized what I did wrong and have a plan for the next similar situation. We never stop learning as traders and we must listen to the “little man” on our shoulder (our gut), because it’s often correct.
You need to accept that you should trade based on what you SEE on the chart; that is to say, based on what the price action is telling you…NOT on what you “want” to happen or what you “think” should happen! It’s time to put your ego in the closet and realize thatyou don’t have to be right to make money trading. Whilst I have been guilty of not exiting trades when I knew I should have based on the price action, I rarely make this mistake anymore because I know that what I want the market to do and what I hope it does, has absolutely ZERO EFFECT on what it actually is going to do! This is a BIG lesson that many traders struggle with accepting for years, but the sooner you accept it and act according to it, the sooner you will start exiting trades at more profitable times.
A little exercise to help you take profits more effectively is to ask yourself when you are up a solid profit on a trade: “What do I honestly think is the highest-probability scenario based on the current price action and market structure?” In other words, you should ask yourself: “considering the overall market structure and price action do I believe this trade will keep going in my favor without much of a retrace, or do I think a retrace is more realistic right now?” If you answer that question to yourself honestly, it will go a long ways towards helping you improve the timing of your trade exits.
Constantly giving back winnings from profitable trades
Scenario: It seems like whenever you hit a nice winning trade and make a solid profit you simply cannot hold on to that profit for more than a week or two. You end up deviating from your trading strategy after a profitable trade because you feel like you’re trading with the “house’s” money. You find yourself making this mistake after almost every winner you have and the end-result is that even though you know how to analyze the market effectively and find high-probability entries, your trading account is still not growing.
Solution: The reason people give back their profits after a winning trade is because the money they’ve just made temporarily masks their perception of the risk in the market. This is similar to why most people cannot walk out of a casino with more money than they went in with, despite being up a nice amount of money while they were gambling. Not to say trading is equal to gambling, but the emotions of a winning trade or a winning bet in the casino are very similar. People tend to instantly think (even if only on a subconscious level), something like “I just made money, so now I have more to ‘play’ with”. Whereas, prior to the winning trade or winning bet they were much more cautious and concerned about finding a very high-probability scenario to take advantage of; after they’ve made the money they often lose this awareness of risk and it’s replaced with an almost over-whelming urge to make more money, which is of course derived from greed.
Three simple solutions to putting an end to giving back all your profits are the following:
1) Keep risk constant until you’ve doubled or tripled your account. Most traders tend to increase their risk per trade way too soon after only a few winning trades.
2) Master your trading strategy and don’t trade unless it’s really telling you to.
3) Physically remove yourself from the market after a winning trade for at least the rest of the day.
If you actually do the above three things, you will be on the track to retaining the profits from winning trades rather than consistently giving them all back.
“That was a stupid trade!”
Scenario: You find yourself consistently regretting many of the trades you take. Too often, soon after you enter a trade you close it out for a loss because you realize you basically just randomly entered because you wanted to be in the market, and then it started moving against you. You look back at your trading account history and you see numerous losses that have slowly eroded your pervious winnings; most are small losses, but you also know most are trades that you shouldn’t have taken; “stupid” trades.
Solution: The best solution to this problematic trading scenario is to simply realize and ACCEPT that you are NOT increasing your chances of making money by constantly being in the market. Trading is a profession that people succeed at by having a high-probability edge, like price action strategies, and having the DISCIPLINE to stick to that edge over a period of time. You need to reach a point where you NEVER regret any trade you take; I am at that point, but it took time to get there. The way you get there is mainly just being very discriminating about what trades you take. You should pass on far more trades than you end up taking; don’t every worry about missing a trade or feel like you’re “missing out” on opportunities by not being in the market all the time. Trading is about finding a high-probability entry scenario in a sea of low-probability ones, sadly, most traders end up taking a lot of low-probability trades and very few high-probability ones.
Entering multiple positions out of greed
Scenario: You’re in a trade that’s up a profit, you see another potential setup and so you move your first trade to breakeven just so you can enter the second trade. The first trade moves back to stop you out at breakeven and the second trade starts moving against you. The first trade then moves back in your favor while the second trade continues against you…at this point you want to pull your hair out and you wonder WHY you even did anything!
Solution: When in a valid trade that meets your plan requirements….don’t do anything unless there’s something to do! Never move to breakeven ONLY to enter another trade…this is greed / emotional trading. There are times when you can add to a position or enter another trade by pyramiding into the market, but these situations typically do not happen very frequently. Especially if you’re a beginning trader or a struggling trader, you should really stick to trading one position at a time until you’re more comfortable with your trading strategy and more confident in your trading abilities.
Denying trends and trading against them
Scenario: A market is obviously trending strongly in one direction yet you still can’t seem to make any money from it. You keep thinking the trend is going to end soon because it’s already been trending for “quite a while”. As a result of you believing the trend just “can’t possibly continue” much longer, you keep betting against it, and losing.
Solution: Trust your gut, trust your eyes and trust what is ACTUALLY happening on the charts…not what you have convinced yourself MIGHT happen. Don’t listen to people on financial news networks telling you all the reasons why the trend is “going to end” soon and don’t trust your trading friend who sounds really “convinced” that he or she “knows” something is about to happen in the market. First and foremost, you need to trust your own analysis of what you see happening on the charts. Once you realize that you can accurately read the price action of the market and that you don’t need outsider opinions, you’re trading confidence will really start to grow. You have to ignore the urge to over-analyze what the market is doing and instead just “go with the flow” and trade along with what you see happening.
Conclusion:
Whether you find yourself in one of the above scenarios or a similar one, you should remember that with enough determination and discipline you can train yourself out of any bad trading habit. The same applies with building a positive trading habit; slowly train yourself into a particular routine and set of trading guidelines…slowly train yourself into following those guidelines, make lists and tick them off as you complete each item to hold yourself accountable and drive home the discipline. You should get enjoyment out of changing your trading mindset and putting an end to bad trading habits, it should be an uplifting experience, like a pressure has been released.
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