Lessons from the Pros

Potential Pitfalls For the New Trader

The day someone decides they are going to pursue a trading career, they are typically making that decision because of the potential financial prize. In other words, they are making that decision because of the perceived benefit. What most people don’t understand, let alone consider, is that they are about to step into a "mine field" of traps that have the potential to drain and destroy their bank account and self confidence all in one. When I look at the traders who do well and those who don’t, there is an obvious observation. The group of traders who focus on the prize tend to lose money and never achieve their goal. The group of new traders that focus on the traps and risks tend to succeed and reach their goal. As always, it’s one group providing income for the other – that’s trading.

The Mine Field

Discipline: This is a must. If you don’t have discipline in other parts of your life, don’t think you will magically have discipline when you start trading. In fact, trading will challenge your discipline more than you can imagine. From birth, we run to things that make us feel good and run from things that we are afraid of. In trading, you have to think the opposite if you want to succeed. What I mean is that we want to buy low and sell high. To buy low when prices are cheap and at a support (demand) level where they are likely to turn higher, you need to buy when everyone else has sold, after red candles, with down sloping indicators, accompanied by bad news, and so on. The act of buying low and selling high is NOT comfortable for the human mind.

Profits and Losses: People love profits and don’t like losses. This simply leads to people taking profits quickly when they have them and refusing to take losses because they don’t want to lose. This action is VERY common and leads to a short trading career. Successful traders take losses quickly when their plan tells them to and they hold on to gains until they reach their target. In other words, they plan their trade and trade their plan. Think of Las Vegas. Have you ever realized how much money a casino loses in a day? The number is huge but they don’t care because they know they have a plan that ensures the gains are greater than the losses so the most important thing for them is to trade their plan. Let me share with you a recent student email.

From: Ryan O.
To: Sam Seiden
Subject: Futures XLT

Sam,

I wanted to share some stats with you. This is since the beginning of the year. Roth IRA Performance:

Notice these results. This is a trader who has no problem with discipline or handling profits and losses. Notice this trader is only right 30% of the time which means he loses seven out of ten times. In two months of his consistant losing trading, however, his account has grown over 45%. The key number here is the "average win" to "average loss." In the Extended Learning Track (XLT) program, we will work to improve his batting average but even if he never did better than this, he is seeing better trading results than most so-called professionals. He is focused on the mine field and well aware of the risk and how to control it.

Determination/Longevity/Position Size: You have likely heard of the person who spent lots of time digging for gold. They dug a deep hole and found nothing. Dug deeper and found nothing. Dug a little deeper and found nothing and then gave up. What they didn’t realize is that they were only five more feet away from the gold. Someone else came in and only had to dig five feet and the gold was sitting right there. Trading is the same. You will be challenged. Trading is like a mirror. It reflects every emotional flaw you have and Murphy’s Law exposes all your flaws very quickly. The journey to self-empowerment with trading is a marathon, not a race so make sure you use small positions while you are learning. Don’t take on risk until your demo trading proves that you have an edge that your competition doesn’t have. Then, begin your trading with as little position size as you can. Let your results dictate when you should increase that size. The problem you need to be aware of is typically, determination goes hand in hand with aggressive action. Don’t let the burning desire (determination) to reach the "prize" lead you to take on too much risk, too soon. Longevity is the key and properly handling risk with position sizing and small losses is the key to longevity. Instead, channel your strong determination into energy that allows you to follow your rules.

There are other traps in the mine field that separate the successful from the unsuccessful and we can cover those in time. If you are a regular reader of our weekly articles or a member of the Online Trading Academy community, congratulations! You have taken the first step needed to end up in the group that achieves consistent low-risk profits. If you are not, you may be a part of the group that provides those profits. While that may seem like a harsh statement, knowing that your hard-earned money is at risk, I think its important to point out the realities of how markets work and how money changes hands.

Have a great day.

- Sam Seiden sseiden@tradingacademy.com