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9 of the Most Expensive Mistakes in Trading and How to Avoid Them

One of my favorite principles in trading also applies to life as well – it isn’t always what you do right, it’s what you don’t do wrong that matters.

Trading is a very difficult endeavor, and also one of the most rewarding in the world. When one excels at trading, they can set their own hours, work for themselves anywhere in the world, and do something that they love. Most great traders are passionate about the art and science of successful trading. They have to be to endure the countess failures and difficult lessons along the way and keep moving forward. Part of my developmental process has always been to analyze my trade history and look for ways to improve it. I learned long ago if I could simply avoid making the same costly mistakes over and over again, I would stand a chance of being successful.

Below are what I believe are 9 key mistakes that traders make, from own personal observations and experience, from 21 years of trading, and how to try to reduce or eliminate them. Keep in mind that my perspective is based on my intermediate to longer term time frame.

I will start by saying that my belief is that good trading does not require bold predictions or market calls. My belief and personal experience is that a sound technically based, price based process, with excellent risk management and money management skills used consistently and with discipline can produce consistent profits over time.


1. Operating Without a Trading Plan

One reason the failure rate in trading is so high is because traders lose enough money that they can not continue to trade, or just give up. Markets don’t beat traders, traders beat themselves. The markets have no idea that any of us exist, they simply go where they go. How a trader positions their money, and what their actions are, is what produces wins and losses over time. Top tier traders treat their trading like a business and develop a written operating plan which identifies process and risk controls. The trading plan is the game plan of which day to day operations are executed off of. Having a plan helps put into place good processes and systems to help develop consistency and reduce emotional trading.

2. Emotional Trading

Possibly the single most damaging thing a trader can do to their accounts is emotional trading. Fear and Greed are the two most detrimental and costly emotions in trading. The seven mistakes below key off of fear and greed. Greed and Fear of missing out often causes traders to take on excessive risk, trade too aggressively or chase positions. Fear of small calculated losses often causes traders to cut good trades early before the stop loss is hit, or to not take a correctly signaled trade at all due to fear of having a losing trade.

3. Not Using Stop Losses

The other side of the bigger winners vs smaller losers equation is to keep the inevitable losers small and manageable. Preserving capital is a hallmark of excellent traders. Many traders personalize their trading and have a very difficult time taking a loss in a position as if it is some kind of a personal affront. My view going in is that I accept that every single trade that I take can be a loser and I pre-determine how much risk and loss I am prepared to take going in. I set a hard stop loss in the market and if it gets hit, it gets hit. I don’t worry about stop runs because I use a volatility based stop loss system based on ATR , Average True Range, and set the stops far enough away that shorter term intra-day chop should not trigger them. I also trade very liquid large cap and mega cap stocks and ETFs.

4. Adding to Losing Trades

Even more financially damaging over time than holding losing trades for too long is to add more money to them on the way down, either to lower the average cost or in hopes of breaking even sooner. When a position moves against you, the market is telling you that it may be wrong. Putting more money into a losing trade is one key thing that great traders caution against and for good reason. Literally one bad, large trade can set a trader back permanently.

5. Selling Winners Too Early

Novice traders tend to focus only on the perceived reward and not on risk. Experienced professionals focus on the risk as well as the reward.  Novice traders think see every time they hit the buy button as a chance to make money. Pros realize that every time they hit the Buy button is also a chance they can lose money. Some of the best traders in history, George Soros, Stanley Druckenmiller, Paul Tudor Jones and Bruce Kovner, (all Billionaires), amongst others have said the key to successful trading is excellent risk control and to have winners that are much larger in size than losers. The best way that I know of to produce large winners is to hold winners for longer time frames. Selling winners too early is often cited as one of the most common and costly mistakes that traders make. Some pros have said that the bulk of their gains over time have come from 15 – 25 % of their total trades. I think everyone either has told or has heard the story of buying a stock at $25 or so, selling it at $30 and then watching it go to $200. Top pros stay in their winning trades as long as they keep working.

6. Using Too Many Methods

There are literally dozens of ways to make money in markets, long term , short term technical trading, fundamental trading, etc. The best traders find one method/time frame that works for them and they focus on mastering that method and time frame. One only needs to excel at one method to be very profitable. Novice traders try to do too much in markets and “do it all” because they think being a trader means they always have to be trading. It is much better to be world class at one method than to dilute efforts and time and be below average at many.  Try to find one method that works for your time frame and personality, and work tirelessly to master that method.

7. Too Much Time Looking at Screeners & Scanners 

There are over 7,000 securities available to trade in the U.S. markets, plus derivatives on top of that. Based on portfolio size, 5 to 20 positions can usually generate exceptional profits if managed correctly. There is no need to “be in everything” or even try to be.  I strive to trade my best technical programs and find the strongest stocks and ETFs that meet my criteria.  I keep a narrow daily watch list of 20 to 30 large cap and mega cap stocks, institutional leaders, and 15 to 20 core ETFs.  By keeping my focus very narrow, I can patiently wait for the correct entry signals and not constantly scanning through 1,000s  of random “new ideas” every day. Some traders spend an hour or hours a day looking at charts, screeners, scanners, indicators, research reports and other data to try to find the “next big winner”. By daily monitoring and tracking  prospective positions often for weeks, it allows me to let the trade come to me and not feel the need to “chase it”.

8. Listening to Media and Outside Opinions

Billionaire trader Paul Tudor Jones said it best, “markets go where they go”. He made billions off that concept, as did Billionaire trader John W. Henry, who owns many sports franchises including the Boston Red Sox, and said “No one can consistently predict anything, especially investors. Prices, not investors, predict the future” The best traders trade price and are open minded to various outcomes. The media, pundits, and even Wall Street firms can all have views that may sound intelligent, but for every prediction or intelligent sounding market call, there is always someone with more money, more data and more information on the opposite side of their view/trade. It is going to take time to develop your own process. There are many good books, video and websites on line as well as professional trading educational services and websites that can teach the basics of developing a sound process. It is better to learn how to and to follow a proven process than to try to rely on the media, or third party information to manage your own money.

9. Trading Too Big

Billionaire trader Bruce Kovner has said novice traders need to focus on risk management and under trade. This can mean having too many positions, having too much money in certain positions, having too much money in the markets, using margin, having too many correlated trades and/or any combination of these. Novice traders try to get rich overnight, but the stats overwhelmingly show they have  better chance of going broke overnight. Some quote billionaire Trader Stanley Druckenmiller , my personal favorite well known trader, who has said something to the effect of going for the jugular and “loading up”  in a trade. Here is the reality of it. You are not Stanley Druckenmiller. Neither am I. He has one in a million, literally, talent and experience levels. The statistical chances that most will never be a Billionaire from trading. The industry odds also state that over 80% of traders lose money over time. If you can learn how to become consistently profitable on an annual basis, that is an accomplishment. If you can learn to generate double digit returns, that is a great achievement. Making money over time start by not losing money over time. Big risks result in big losses, sometimes career ending losses.

Learn how to avoid repeating these 9 costly mistakes, learn how to not beat yourself, and you stand a very good chance to join the ranks of consistently profitable traders.

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