This time of year most of western civilization is reflecting upon the year gone by, thinking about what they did right, what they did wrong and how they can improve themselves in the New Year. Similarly, if you’re a trader, you’re most likely reflecting on some of your good trades and bad trades and doing some much needed self-analysis on your overall trading performance over the past year.
Because of this self-reflection process, people often come up with “New Year’s Resolutions”, whereby they make promises to themselves on what they are going to try and improve upon or accomplish in the New Year.
After reading today’s article, I’m going to ask you to write your “New Year’s Trading Resolution”, and I hope you can be honest with yourself and your trading peers, and hold yourself accountable to the promise you make to yourself. Your success and happiness depend on sticking to these revisions in your life and trading, so put some effort in and make a list of things you want to improve and accomplish in the upcoming New Year.
To give you some ideas, here’s a list of the most common problems I hear our members talking about on the members email support line and in the members discussion forums.
Perhaps this list will be confirmation that you’re not alone and that others walk a very similar road to you in their trading journey…
I got out of too many trades early, should have held it!
How many times have you entered a trade that you knew was a high-quality price action signal within a strongly trending market, saw the trade take off in your favor and then you quickly take what you considered to be a decent or even pre-planned target and then the market makes a HUGE move without you on board? Whilst it’s good to take a decent profit, especially if you pre-planned your target, but you also must consider the context of the market so that you aren’t leaving a ton of money on the table. If a market is screaming along and trending very aggressively up or down, remember to keep in mind that markets move further than we think. Crowd psychology is a funny thing and traders will keep pushing a market higher or lower in a self-fulfilling type of way (the higher a market goes the more people want to buy, etc.). So, don’t limit yourself to a relatively small profit target if you are trading a trending market.
In this scenario, you can let the market take you out, by perhaps waiting for a strong price action signal that is counter to your entry. This may not occur for days or weeks, so get ready to employ set and forget trading so that you aren’t sitting there watching the screens all day. I suggest checking in on your trades once a day after they’re live, just to see if any major reversals formed that are contrary to your trade, but barring that scenario, you should just leave the trades alone. This can be a difficult thing to do psychologically, because your natural inclination is to check your trades throughout the day, but, I promise that if you do that regularly, you’re going to end up closing many trades out just before they really get going in your favor.
Unfortunately, there is really no way to know ‘for sure’ when to exit a trade. But, remember what I said above, take the context of the chart into account. If it’s a trending market, try to hold it for larger than a 1:1 or 1:2 gain, if you’re trading a trading range, well then you will naturally be taking a smaller profit since you want to exit near the boundary of the range.
When in doubt, remember, you don’t need many winning trades to post a very nice percentage gain on your account per year. I have made much more money by trading less often and letting big trades run than I ever have by taking small winners and trying to trade a lot.
I missed that trade, should have taken that signal!
How many times have you identified a trade entry you thought was a good one, but then for some unknown reason you just didn’t enter it and then it went on to be a huge winner without you? This can be extremely frustrating and it’s something all traders experience at some point. However, if it’s happening to you on a regular basis, you have a bigger problem you need to face; confidence.
Becoming a confident trader who doesn’t hesitate when they see their trading edge present is something that takes education and experience, as well as time. You absolutely do not want to become a deer in the headlights trader, right? In other words, you don’t want to become ‘frozen’ when you see a trade signal on the charts, you want to feel confident in your decisions. So, you must first know what you’re doing, what your trading strategy is and have an anticipatory trading plan. If you don’t definitively know what your trading edge is, you cannot possibly develop the confidence to execute a trade without hesitation.
The other major issue is having a problem pulling the trigger on trades even if you know what your trading edge is. This stems from two things typically: 1. Risking too much or trading too large of a position size for your account and psychological makeup. 2. Not having developed a confident trading mindset. The former issue is a pretty easy one to solve, you just must accept that you need to dial-down your dollars risked per trade until you no longer fear losing the money. After all, if you are worried about losing money on a trade, it’s going to inject fear into your decision to pull the trigger or not. The latter issue, of not being confident, is something you can develop by taking it slow, learning the proper way to read the price action on the charts and getting some smaller wins on the board in the beginning.
My trade missed my target and reversed.
How often have you had a trade move in your favor but then barely miss your target and then reverse, coming all the way back to your entry point or going negative? This is maddening. What can you do to avoid this?
Well, number one, understand that not every trade is going to win, this is just a fact of trading that you have to accept early on if you want to survive or thrive in this game.
Next, it’s possible your targets are too ambitious (far away). Are you reading the charts properly and are you aware of the key levels that are nearby? You should always set targets slightly before a key level, because price sometimes will reverse just before the level is hit. Also, paying attention to the average true range of the market you’re trading is a great tool to assist you in placing profit targets because it shows you how far a market is moving on average per day.
I risk too much, I get greedy and emotional.
If you are chronically risking too much per trade, this is obviously a huge problem for you and it’s probably causing you to lose a lot of money. How can you stop this?
Part of the solution is simply being honest with yourself and deciding to become more disciplined. I cannot force you to risk a safe amount per trade, so this one is on you. You must dig deep and realize that if you are risking more than you’re comfortable with losing per trade, you’re going to open a Pandora’s box of emotion-fueled trading mistakes that are going to cost you a lot more than just money.
What I like to do, and something I recently wrote an article about, is what I call the risk sleep test. It may seem simple on the surface, but as with most anything in life, minimalist approaches are what work. All you must do is make sure you’re risking a dollar amount that is low enough to where you can close your computer at night, get ready for bed and fall asleep as usual, without obsessively thinking about the market or your trades. You should not be waking up thinking about the charts or your trades. In fact, if you have risked a safe amount for YOU, you should even forget about the markets for a while. If it’s the first thing on your mind when you wake up or making it so you can’t sleep at night, DIAL-DOWN THAT RISK by dialing-down your position size.
I’m trading exotic Forex pairs and random commodities and the trade setups don’t work!
Beginning traders, and even some experienced ones, tend to log into their trading terminal as if they are walking out onto a casino floor; mesmerized by all the pretty lights and games. Just because we have access to many trading products doesn’t mean we trade all of them! Read that last sentence again.
The market wizards and other trading greats are not trading the Mexican Peso or Lean Hogs, for example (although, no offense to pesos or pigs). In my experience, it’s best to trade a core list of products and have them on a watch list. You want to trade major Forex pairs, major stock indices and major commodities. The primary reasons for this is because the liquidity is better, they are going to be more predictable in their price action and the fees or commissions are lower too.
I traded too many times this month, and lost half my account!
My personal experience and belief is that day trading short term moves in the market is a major reason traders fail. The lower the time frame the more false signals and ‘noise’ you will encounter. Day trading also chews your account balance up because you constantly pay the price spread (in forex), on 100 trades you pay 100 to 150 pips in spread on average, do the math!
Emotionally, day-trading often leads to trade addiction, which is a huge problem very similar to gambling addiction. The brain chemistry of a trading addict will look very similar to that of a drug addict. The very process of trading releases a flood of dopamine and they get hooked to that feeling. Soon, they are trading just like a drunk guy at a casino; with no rhyme or reason behind what they are doing, simply chasing that feeling or rush.
I had a profitable period of trading and then gave all my profits back!
Have you experienced a profitable month or two of trading where everything seemed to be going as planned, followed by a month where you gave all your profits back to the market? You’re not alone.
Be aware, markets have cycles whereby they trend and then move sideways, and typically the sideways periods last longer than the trending ones. People make money in markets that are moving up or down and they (erroneously) begin to believe the market will always behave like that, and as a result, they get super confident as with the recency bias I wrote about. This causes them to increase risk and continue trading, unaware when the market dynamics change, and then they get shredded to pieces, giving all their profits back.
Great traders read charts and understand markets, they are confident not because they win trades but because they can read a market and avoid excessive losses. When you look at charts and see price action signals, look at the context or the story on the charts and don’t just trade ‘blindly’. You always need to map the key levels and look at all recent price action signals and determine if the market is repeating those signals and producing good moves from them OR are there a lot of failed signals and unpredictable moves on the charts?
I always look at everything that’s going on, I pay attention, I don’t just trade ‘blindly’ and I DEFINITELY don’t keep trading constantly on the same market month in and month out. There are times to step aside and wait for the market to show you the trade.
My hope is that today’s lesson will give you some ideas to begin the process of analyzing what you did wrong (and right) over this last year so that you can make a list of what you need to improve on for the New Year. This is an exercise, that if done right, can be the boost you need to get your trading on the right track.
What’s your biggest ongoing mistake or problem in the market? What’s something you really know you need to improve and change in your trading over the next year? Please share it with us in the comments below! By doing so, you not only help yourself by being accountable, but you also help your trading peers by letting them know there are others who have the same struggles and the same goals that you have.
Good trading and Happy New Year! – Nial Fuller