With all the fancy charts, fundamental analysis, and experience with price action, you would think that the majority of traders would be profitable. The sad fact is that most are not successful. The majority of all traders contribute to the profits of the minority that are profitable. Even seemingly successful firms like Amaranth and Long Term Capital Management can, and do, blowup. Individual traders like Victor Niederhoffer, who looked like a market wizard for the majority of his career, destroyed more than one account. In fact, most professional money managers fail to beat the benchmark index they are paid to exceed.
Why is this? If it was just a matter of being smart, then the trader with the highest IQ would make the most money. If it was only a matter of charting skills, then the trader with the most complicated charts would be the wealthiest.
Here are ten fatal errors made by misguided traders who are destined to fund the accounts of more skilled traders.
- A trader must have a trading plan with well-defined entries, exits, and position size before they make any trades. Trading with no plan creates random results, and the profits that are won as a result of chance will eventually return to their rightful owners.
- Traders must have an edge to be profitable. The traders that have discipline, have done their homework about historical price action, and stay in control of their emotions will make money.
- The biggest mistake that the majority of traders make at all levels, is that they trade too big. Big position sizes cause emotions to run high, infringing on reason. Big losses are also more financially and emotionally devastating. The position size of a trade should never put a trader’s lifestyle or trading career at risk.
- When the markets open, the trader must have the discipline to follow the plan they created when the market was closed. No system will work if the trader does not have the discipline to follow it.
- When a trader’s desire to be right is greater than the desire to make money, they will illogically let a losing trade run to avoid admitting that they are wrong.
- Fear of giving back a small profit will cause a trader to miss a bigger winning trade. Most profitability is based on the big winning trades. A winning trade should not be exited until there is a good reason to do so.
- If a trader does not take their original stop loss, they will allow small losses to become big losses. Big losses generally are what cause a trader to be unprofitable. Many good trading systems become profitable simply by removing the big losses from the trading results.
- Traders that do not account for events outside the known bell curve can be ruined. Events that have never happened before can happen. Hedges, stop losses, and position sizing are the insurance policies against the sudden risk of ruin.
- Traders with too much hubris will eventually make a decision that insures a fatal trading result.
- Personal predictions have no value, because the future does not exist in the present moment, no matter how strong a trader’s convictions.
Long-term, successful traders have many common characteristics: They religiously follow a plan, they have an edge over the majority of market participants, risk management and capital preservation is their number one priority, and they go with the flow of the price action rather than predict. They also admit they are wrong quickly, and never quit learning.
The humble and the flexible traders are the most successful risk managers, and they will end up with all of the chips in the end. Trade safe. Thanks for reading.