Seven Deadly Trading Mistakes - Part One
By studying at the most frequent reasons for failure, we can
avoid making the same mistakes as the crowd, and thus turn these
negative points into positives. In this series of articles, I
will be looking at the seven most common mistakes I see made by
traders.
Mistake Number One - Switching Strategies or "The Hunt For The
Holy Grail"
The holy grail of trading - we've all looked for it - the super
system that never loses. We've searched forums, read books, been
to seminars, discussed in chatrooms, but the secret system that
wins every time continues to elude us.
Why do we waste so much time and effort searching for something
that doesn't - cannot even - exist? Because it's far easier than
facing up to the reality that trading isn't quite as simple as
buying when a magic indicator says "buy" and selling when it
says "sell", and watching the endless profits roll in.
Actually, it is almost a simple as that, but we'll come to that
later in this series. For the moment, the important thing is,
that there is no holy grail-always-wins trading system.
The grail hunt is a highly destructive behavioral pattern that
affects almost every trader at some point in their career.
Typically, the trader starts by learning a system or strategy,
and trading it for a short period of time. The strategy may
prove profitable almost immediately, or may incur an early loss.
Either way, sooner or later a loss will happen, and equally
inevitably, a run of losses will occur together. At this point,
the trader decides that this is not the system for them, and
heads off in search of a new method.
In jumping from system to system in this manner, the trader
never gives a strategy time enough to prove itself over the long
term. All systems involve some losing trades, that's the nature
of the markets, but as long as a strategy has positive
expectancy overall (that is to say, it will on average win more
than it loses), those losses are of no importance.
Action: As traders, we must accept that fact that losses are to
be expected, and stick to our chosen system for long enough to
prove or disprove its expected long-term outcome. In doing so,
we break the grail hunt cycle and overcome one of the biggest
obstacles to our success.
As a final note on this subject, I want to add a word about
forums and chatrooms. Whilst these are undoubedtly excellent
sources of information and ideas, they can be very dangerous in
fueling the cycle of strategy jumping. The nature of these
resources means that they continually offer new ideas, and to
the trader that means new temptations. By all means test out or
paper trade new ideas alongside a live strategy, but beware of
becoming a forum-follower and re-entering that pattern of always
jumping aboard the 'next big thing'.
In the next article, I'm going to look at trading plans, and why
failing to plan means planning to fail.