3 Pro Habits Rookie Traders Can Copy
09/01/2011 4:00 pm EST
Becoming a good trader means developing good habits, and Travis McKenzie describes three common areas where traders often go wrong and tells how to avoid the common pitfalls.
My guest is Travis McKenzie. Travis, what are some of the biggest mistakes you find traders making?
I think there are three key mistakes that traders make which they’ve probably never really thought of before. It’s not stuff you probably read about a lot in books or seen in a lot of seminars. The first one is that when they trade, they base their trading on two huge ingredients.
I relate it to, say, baking a chocolate cake. You can’t bake a chocolate cake with just three ingredients. You need to have five, six, seven ingredients. So when I’m looking at a strategy, I want to see at least eight things lining up in my favor before I take a trade. At a minimum eight…it can be anywhere up to 15-20 things.
So I’ll break it down. These are the eight essential things I must have, and then if I do a scan of the markets and I come up with five or six set-ups that meet my essential factors, I’ll then apply a number of bonus factors and whichever of those set-ups meet the most of my bonus factors as well, that’s the highest-probability set-up.
What you find with most retail traders who aren’t making money from trading is that they’re looking at two or three things. They might be looking at trend, maybe a support and resistance line, and maybe one other thing. That way they’ll find a lot of trades, but they might not be high-probability trades.
So we want to look at a lot of variables. Is there a possibility that you can have so many that you become paralyzed?
Very true, very true. There’s a point where they have to complement each other, but at the same time, there’s got to be enough to filter out the bad trades.
Or, if you’re finding out that you’re taking a lot of trades every day and your win/loss ratio is very low, that’s probably the biggest area I think you can have a look at.
See related: How to Overcome Overtrading
What’s the second-biggest mistake?
The second-biggest mistake is that they aren’t focused on what I call “flawless execution.” They focus on whether their trades are a winner or a loser, so at the end of the day, end of the week, I don’t care if I’ve made or lost money.
All I care about is if I flawlessly executed my trades in accordance with those factors and the checklist I made. So at the end of the week, I’ll sit down with the screen shots and the trades I’ve taken, compare it to my checklist, and if I’ve traded exactly (flawlessly executed that trade), I’m happy regardless if I’ve lost or made money.
I think a lot of people focus too much on winning and that causes them to break their rules.
See related: Why P&L Doesn’t Determine Success
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So execution, execution, execution.
Flawless execution. That leads to the third area; that the record keeping lets them down.
So we mentioned screen shots. What you need to do is take a screen shots of what the charts look like when you place that trade, because in six months’ time, if you’ve just kept the spreadsheet, it’s very, very difficult for you to go back and find how the charts were looking at at that exact point in time.
With screen shots, you know exactly how the charts were looking at that point in time. You can then look at your checklist, and you can work at flawlessly executing.
So three simple things that anyone can do, and it will make a dramatic improvement to their overall trading.
It sounds simple, but it can’t be that simple because not everybody is able to do it.
It is that simple. The thing is people don’t do it because they look for the more complicated, fancy, sexy thing that they think is going to make them money.
Truly, I’ve been charting for many, many years, and it’s the simple, basic things, in my opinion, that will make you money in the long run.
See related: How to Get Started in Chart Reading
So again, just to reiterate: we want to have at least eight variables that you want to confirm.
At least eight factors lining up. The more the better, but as you said, don’t get to a point where you’re paralyzed.
From that, you can make a checklist out of those factors, and never enter the trade until you’ve checked those points off.
From there, you want to focus on flawlessly executing that checklist; that was the second one.
Then the third thing, what you need to flawlessly execute, is to have those screen shots so you can see exactly what you’re looking at. It’s very simple to take screen shots.
These are very simple things, but things that I’m sure a lot of people have never thought of before.