You may already be aware but successful trading is not the result of hitting a massive home run. It is, however, about avoiding the stupid mistakes we find ourselves repeating time and time again.
In this article, we are going to look at the top eight challenges traders face, which stop them from achieving success in the markets.
- Cutting the big winners off too early
Cutting your wins off short is a huge challenge for traders because you never know when the few key trades are going to hit your account each year.
The reality is, most trading systems have a small number of outstanding trades in any 12-month period. If you find you are cutting your wins off short, you will never have the opportunity to lock in those outstanding winners.
For many traders, it is the outlier wins which make their entire trading year.
You see, the reality is, most traders hover around breakeven month after month.
The best traders are patient and wait for the outlier wins to hit their account.
Let me run with a golf example. Jordan Spieth recently won the Travellers Championship. But after 72 holes he found himself in a playoff.
Patient golf got him to the sudden-death playoff hole, but his second shot found the bunker, leaving a difficult up and down for par.
By trusting his game and being patient, he took his shot, and the ball launched out of the bunker, skipped a few times and then hit the bottom of the cup. Birdie and the win.
Patience got him there, and patience paved the way to victory.
You never know when that winning trade is going to come your way.
Most traders are terrible with handling the emotions of winning trades. If you find this to be a weakness, work on executing a mechanical exit, removing you from the equation.
- Changing your trading system every few trades
Nearly every system runs into a losing streak. Following a losing streak, the tendency for new traders when sitting on an open profit is to run for the exits and lock in the winner.
Or you get spooked by the Dow Jones falling triple digits in overnight trade and decide to bail on a few small losing trades before they hit your exit.
If you ever have thoughts of truly scaling up your trading system, you must stop jumping in ahead of your system.
You will never build the confidence to trust your system because you keep changing it. How are you going to double or triple your capital allocation if you keep second guessing and running for the hills every time a bad announcement is aired?
Once you put the time into developing and back testing a trading system, you have to commit to trading it full-time, according to the rules you have in place. Only then can you build your confidence to get to the next level.
- Zero money management plan
Newbie traders love exciting new entry techniques. But if you have been trading for any length of time, you begin to realise how little entry techniques equate to success.
Instead, it is through a robust money management plan that will allow you to achieve your financial goals.
Your money management plan will tell you how much to place on a trade and how much of your capital to risk on any one trade.
Focus on risking 1% or less of your capital in any one trade at any one time.
If your back tested results suggest you have a strong edge and minimal drawdown, you may want to consider risking up to 2% per trade.
But the only way to push your levels of risk is to truly know the key numbers of your trading system and know your edge.
- Letting the small losses run
Who wants to be reminded of this rule, hey? How annoying.
The truth is, if you have ever traded for any length of time, you have a few ‘investments’ in your trading account. You know, the ones that started off as small losses but you decided to wait for it to get back to breakeven?
Argh. These are the bane of every trader.
You know you must cut your losses, and yes, that even means on your latest piping hot tip you got from your ‘finance friend’.
The biggest challenge with letting losses run is not the financial loss, but the opportunity cost and mental anguish of constantly waiting and hoping. Don’t do it.