Remember that a “bad trade” isn’t always a trade that loses money. That’s the outcome of a trade. A bad trade is one that you didn’t strategically envision or control from start to finish.
It sounds tricky, but here it is:
- A bad trade that ends up with a profit is called “luck.”
- A bad trade that ends up losing money is just a bad trade realized.
- A good trade that ends up in profit is well-executed.
- A good trade that ends up losing money is a statistically expected drawdown.
Profits and losses are all part of the trading enterprise. You need to expect both but in relation to a statistically favorable model (whether real or hypothetical).
No trader in the right mind would ever adopt a system or methodology that’s proven to fail from the get-go. Yet many traders hold on to systems that consistently drain their capital.
So if your trading approach is consistently losing, then either a) you didn’t vet the approach thoroughly beforehand, b) you don’t know how to assess a given approach (which is crucial), or c) your approach doesn’t come with a solid risk management strategy.
How to Fix It: Before you adopt any trading method or system, be sure you evaluate what you’re about to adopt. Make sure the data sample is large enough to sufficiently represent how it has performed over time. If you don’t know how to evaluate a system (and there are numerous ways to do this), spend a lot of time learning how to do it.
When you place a trade, you have to know not only the odds of the system you’re using but, on a tactical level, where your entry and exit points are, the size of your position, and the impact the trade might have on your overall capital should it turn out to be a losing trade.
5 bad habits that break good traders
1. Not trading with a proven strategy or Not Sticking to Plan . Without a sound strategy you really are stabbing in the dark. The right to trade intuitively – where you place trades based on gut feel – needs to be earned. You need to put serious screen-time in before you start getting a subconscious feel for market activity.
Why deviate from your trading plan if you’ve fully analyzed it and have decided that you have full confidence in its performance? If you’ve deviated from your system for no reasons concerning the “tweaking” of its mechanisms for improvement–meaning, you’ve thoroughly studied the impact of your alterations beforehand–then you’re simply being undisciplined.This bad habit is a matter of personal impulse and distraction. In many cases, however, it reflects a lack of confidence in the system. And it’s your job to figure out whether your lack of confidence is justified or not.
2. Trading without a plan telling you exactly what to do, when. The trading plan tells you how, when, and where to deploy your strategy. You should be left in no doubt what you need to do when (it should even tell you when you should stay clear of the markets – staying flat is a perfectly legitimate position of its own).Unprofitable traders take small profits too quickly and keep losing trades too long in the hope that they will bounce back. Profitable traders aim for big profits, taking small losses when they are wrong. Being too quick to take profits while allowing losses to grow, is a sure fire way to blowing up your trading capital.
3. No risk management measures in place. Do you have a method of measuring how much to risk on each trade? It can be as simple as breaking down your account into 1% ‘Units’ and risking a single unit on each trade. The location of the stop loss order will let you calculate how many units to risk (and may even keep you out of volatile markets completely – the risk may be too great for your account size on certain trades.
4. Unprofitable traders think trading is about being right. This is an ego driven concept. They’ll even do this to the extent of losing money. Profitable traders keep their ego in check and understand that losing is part of the game.Unprofitable traders are too focused on how much they will win if they are right. Rather than how much they could lose if they are wrong. Trading is all about risk management and position sizing. Have these rules in order first then ensure you follow them.
5. Emotions begin to dictate your ability to place trades.If you’re not taking all the trades your plan says you should you are gambling. You might feel like you’re playing it safe by dodging the odd trade that ‘looked bad’. But by doing so you’re riding rough-shod over the probability and expectancy of your strategy. Missing out trades can be just as bad as firing off orders willy-nilly. It does require a bit of mental toughness but this truly is the essence of success in the markets.If you have every reason not to feel emotional about your trades, if you have every reason to feel confident about your trades, and still you’re plagued with fear or greed, then perhaps trading isn’t for you.
Do a quick self-audit in a quiet moment today.