4 Habits of Undisciplined Forex Traders
07/06/2015 9:00 am EST
For many traders who struggle with inconsistency, the problem isn't in their strategy, it's a lack of discipline, says Rick Wright of Online Trading Academy. Here are four common mistakes made by undisciplined traders that produce unfavorable results and oversized losses.
I once had an interesting conversation with a couple of forex traders. The interesting part was that it was the same conversation I've had with dozens of traders from around the world, be it in class, in an airport, or even listening to a cab driver tell me about his trading.
The conversation starts the same way: "I know a lot about trading/charts, but I'm not consistently profitable." My response is always along the lines of, "Are you disciplined?" and "How are you defining 'consistency'?"
Let's look at discipline first.
Many people say-or think-that they are disciplined, but there is one way we can easily tell for sure. What is the profit and loss total in your account? If you "know a lot about trading" and your profit and loss (P&L) is negative, or red, over time, you are not a disciplined trader.
Your computer monitor is like a mirror, showing you your true discipline level. Every professional trader will take losses, but these losses are small. Some pros take frequent, very small losses, while others take less frequent but slightly larger losses, but regardless, taking only small losses is how we stay in this business.
Here are some ways that traders show their undisciplined side:
- Do you plan all three parts of the trade
before you hit the buy or sell button? This means knowing where you will enter
the trade, exit with a small loss, and exit with a larger gain. If you don't
know all three parts of the trade ahead of time, you are doing it
If there "isn't enough time to figure those out, because it's moving now," you missed the good entry. Are you buying after several large green candles, or selling after several large red candles? You are late to that trade and must be disciplined and wait for the next one!
- Do you leave your stop loss alone, never moving it in the wrong direction? Meaning if you planned to take a 20-pip stop loss, do you move it to 30 or 40 pips to stay in a trade that is going against you? This is changing your original plan, and one of the biggest mistakes that non-disciplined traders make.
- Do you add more to a losing trade? This is commonly called "averaging down." It is also known as "throwing good money after bad." A very famous and successful trader has a sign over his desk that reads "Losers Average Losers."
- Similar to number two, do you start a trade as a short-term trade, then decide to hold it as an "investment" because it isn't working out? I had a student who once said, "I haven't taken a loss in months." Sounds like he must be doing great, right? So, of course, I asked what he had in his account. It was entirely margined out on stocks that he was losing money on. He hadn't taken his small losses, and was now "stuck" in several losing trades because of it.
As we like to say in class or in the Extended Learning Track (XLT) program, trading is simple, just not easy. The difficulty comes in being disciplined enough to take the small losses and to let your winners run.
Your computer monitor will definitely be the mirror of your personal trading discipline! The best traders will quickly take their small losses and happily manage their winning trades until their profit targets are achieved. Simple, isn't it?
NEXT: How Do You Measure Consistency?|pagebreak|
Another question that comes up in class is the matter of consistency.
When someone says that they aren't yet consistently profitable, my next question is, "Consistent versus what?" I prefer to measure consistency over monthly or even quarterly time frames, never on a day-to-day basis.
Many profitable traders will have a losing day-or two, or three-during a week, but these losing days are small, while their winning days are much larger. If you aren't consistently making money every day, welcome to the majority of professional traders.
See related: How to Achieve Consistency Faster
Even comparing one week to the next is too short of a time frame, in my opinion. One week could have very few economic announcements and low volatility, while the next could have several central bank interest rate announcements and much higher volatility. Which week should have larger winning trades? Probably the more volatile week.
Here is an example of the different times to which a trader may compare themselves. In the box marked 1, a swing or position trader (someone who holds trades for many hours to several days) may be flat in their account as the market pauses, trading with a falling Average True Range (ATR) of approximately 120 pips. Can they compare that time frame to time frame number 2, an obvious uptrend with increasing ATR? Of course not! Those traders should do much better in the area marked 2 versus 1.
What about the daytrader who only holds for a few short hours? Should they compare their performance in box 1 to their performance in box 3? The ATR in box 3 is much higher, nearly 180 pips. Their winning trades probably have many more pips in this area of the chart versus area number 1.
In the end, your profit and loss will inform you of how disciplined you are. If you find your consistency lacking, make sure you are comparing your trading in the proper way. As has been mentioned many times, charting is the simple part of trading! If you know a lot about charting and are still not profitable, concentrate your efforts on improving your discipline, not looking for the "Holy Grail" of indicators to give you 100% winning trades. This does not exist.
By Rick Wright, instructor, Online Trading Academy