Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
5 Key Points Why Traders Fail
07/22/2014 6:00 am EST
Ryan Littlestone of ForexLive.com highlights five things that every trader should keep in mind before pushing the buy or sell button.
There are one thousand and one lessons to be learnt by the inexperienced trader and unfortunately most of them have to be learnt the hard way. Not all lessons have to come as a result of some pain to you and your trading account if you can grasp the simplest of rules early on.
Here’s my top 5 things that EVERY trader should keep in their mind before pushing the buy or sell button on their systems. When we disrespect these rules we lose money.
- Why are you trading and what do you want to achieve?
This is probably the most important question to ask yourself before stepping in the ring. Are you trading for a bit of beer money, to supplement your income, for full-time income, because you’re out of a job and need an easy way to make money, you’re a gambler? You need to ask yourself why you want to trade and answer honestly, because if you don’t, then you’re on the road to ruin already.
The greater the need to trade the higher the pressure and the more likely you will lose. Just like competitive sports’ professionals, very few traders can deal with the pressures involved when livelihoods are on the line. If you can’t handle the pressure it doesn’t mean you shouldn’t try but you need to trade at a level where the pressure is contained.
Don’t go throwing your life savings at trading. Start small and in amounts that have an emotional balance somewhere between “It means nothing” and “Oh, shoot, I’ve lost the house.” Pick your comfortability level and stick with it until you have learnt and are confident enough to move it up the scale.
Trade for what you really want to achieve and set trades to those parameters. You don’t need 1000s of pips a week to have a more comfortable lifestyle. Compare yourself to the average rest of world, not the billionaires. What do you need to pay your bills or make a material difference to your lifestyle? I bet in real terms in won’t be much. Be realistic.
- Learn the ropes from top to bottom
Trading can seem the easiest thing in the world when you’re outside looking in but that first day you sit down with your money on the line can be daunting. Fundamentals, technical analysis, trading systems, you name it, there’s something that will make you money. Rubbish Number One! The only thing that will make you money is you and what goes on in your head. There is no get quick rich scheme, except for people who run get quick rich schemes.
Just like riding a bike, you have to start somewhere and the easiest route to take is technical analysis (TA) as just a few key presses can have your trading screen pinpointing where you can make money.
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Rubbish Number Two! TA does not tell you how to make money. It gives you points that can potentially lower the risk to any trade you wish to undertake. Our minds need something physical, a point to show that we’re not jumping in with our eyes closed. TA gives us that but it needs to be taken in context with other factors like fundamentals. Big technical levels close by are going to count for nothing if a tape bomb hits or if an indicator massively exceeds or misses expectations. Use TA by all means, but don’t rely on it and don’t let your house rely on it either.
Fundamentals are all around us. You see it when your local bar puts the price of a pint up, or when you go to fill your car up with fuel, or when your electricity bill is higher. You don’t have to be a graduate in economics to understand the basics. Interest rates go up or down, inflation goes up or down, retail sales go up or down etc, etc. Up or down, good or bad, it’s the constant in fundamentals. Get a feel for everyday life and your own situation and you get a grasp of fundamentals. Everyone should have some grasp of fundamentals. Would you go and get a massive mortgage at many times your income level if you knew interest rates were going to go up and cripple your finances? That’s understanding economic fundamentals and they apply just as much to trading as they do on a personal level.
Think of them like a tide. If you understand the direction then you understand what to look for as directional bias when trading. When fundamentals point a particular way they usually run that way for a long period of time. Don’t fight it.
Keep TA and the fundamentals simple and learn how they work before jumping into the heavy stuff. Once you’ve grasped the basics then look to expand if you see fit. Chances are you won’t need a pair of batwings or 15 years of M4 money supply knowledge to improve your profits as the simple stuff will serve you just fine. Find your direction with the fundies and use the tech to guide you.
- Keep it simple and have a trading plan
Another big one that we need to staple on big and little signs all around our trading desks. You’ve done your analysis so now it’s time to trade, but where do you get in and out, and where is your pain threshold?
Not having a plan is one of the biggest reasons traders lose. Use TA and you have the points that can define the entry, exit, and stop points. They all need to be taken into consideration. It’s no good doing analysis and plotting a tech entry point, then hoping for 1000 pips, then completely ignoring the tech in your way. Learn to use it and highlight where your trade may or may not go as this gives you the opportunity to assess your trade and the ability to lock in your profits.
If you’re trading the fundamentals then gauge how far they have to run and what that means for the price when they stop.
Once you have a plan containing your entry, exit, and loss points then you should be able to lose some of the emotion from the trade. If you are prepared, you won’t be the deer in the headlights if your trade goes sour. You know your risk and you can mentally prepare for it.
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- Learning to take a punch
No one likes losing and no one likes losing money, but losing is what you will do. As above, if you can mentally plan for a loss then you can cope better when it happens. Take it on the chin, don’t dwell on it and move on. Definitely don’t jump straight back into the same trade because of bravado that you can get your money back or double down on a loss in the hope it comes back. Hope is not a strategy. Go back to the drawing board and start again on a new trade plan.
Remember, trading isn’t about getting it right, it’s learning how to get it wrong less often.
Hopefully, you’ve found the first four points very insightful and they’ve given you food for thought, and will see you trading accounts swell. They’ll get you nothing but pain if you don’t have the discipline to follow them though.
If you can’t follow 5 simple rules then you might as well take the cash you were going to put in your trading account and blow it all on a massive holiday or booze up. At least you’ll get some enjoyment from it. You won’t get any enjoyment in seeing your hard earned cash whittled away if you don’t have the discipline to manage your money and your trading account as best you can.
It’s not easy, and discipline is one of the hardest principles to follow, even for the seasoned trader. There are many factors that will draw you off the reservation and you will follow them like a lemming off a cliff. It’s how you let yourself go and how quick you can get back on track that will determine whether you survive.
With experience, you can learn to go off the beaten path sometimes but that experience can take many years to develop. It’s easy to read about traders who have made millions and forget that often it took a lot of hard work to get to where they did. It’s very hard for most of us to stick rigidly to the simplest of things let alone something as important as this. Go back to the sports analogy and the principle is the same. The discipline a sports person follows is what separates them from the rest of us. That doesn’t mean we need that same level to compete in trading but we do need a higher level to get by. If you haven’t got it or can’t develop it then you need to go back to step one and ask yourself the question again.
By Ryan Littlestone of ForexLive.com
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