Hello traders, welcome to Part 2 of Stupid Things I do.  The items I’m listing today all stem from having an attitude about trading that is way too relaxed or just straight up not being in the right frame of mind.

1.  Enter a trade without adequate supporting evidence:  This happens often when I have some time to spare and get on my laptop or phone to review trends and something catches my eye; then I say to myself  something like “hey, that looks like a good trade,” or something along the lines of, “I’ll just take a small trade here and pick up a little extra”, or the worst of all “price is definitely going to turn right here I’ve got to get a piece of that action.”  These things rarely ever work out. The decision to enter a trade needs to be planned and deliberate with evidence backing the decision, not made in the spur of the moment.  One easy way to protect yourself from falling into this trap is to commit to only enter discretionary trades (i.e. non automated trades) during specific times that you have set aside for trading.

2.  Trade at an inopportune time:  This is similar to Stupid Thing #1 but relates more to my surroundings than it does not performing an adequate analysis before entering.  Assume that I am somewhere I am committed to do something.  Maybe I am at a social gathering, a medical appointment, or volunteering for something.  The key is that I am somewhere that involves commitments with a higher priority than monitoring trades.   Assume that I have actually done adequate analysis to justify entering a trade.  I enter the trade and then someone comes to talk to me or my help is requested.  I can then be taken away from the trade at any moment’s notice without having time to determine if I should exit, enter a limiting order, or adjust an existing order.  The remedy for this situation is easy because it is the same as the fix for item #1 above, ONLY TRADE DURING DESIGNATED TIMES.  If you absolutely just can’t control yourself, perhaps make your rule that you will never trade from your phone.  Of course, the nuclear option to address this and Stupid Thing #1 is … (GASP), remove trading apps from your phone.  The market will still be there when you get back to your laptop.

3.  Not walk away when I should:  I have an awful joke for you.

 A man carried his buddy into a bar… I know, it usually works the opposite way (i.e. man has to carry his buddy OUT of the bar) but this situation was unique because his buddy had no limbs or torso.  The man sets his buddy down on the seat next to him, takes a seat himself and orders two shots of whiskey.  He takes his shot and then helps his poor friend take a shot.  Just as his friend swallowed the shot, a neck and entire torso rapidly grew out of his head.  The bartender was so amazed that he offered a second round “on the house.”  Sure enough, after the second shot the head and torso grew some more as a left arm sprouted and grew to full length, complete with a left hand.  The bartender, still amazed said “I’ve got to see that again” and offered another round on the house, noting that this was the last round the house could buy.  As the left arm balanced the torso and head on the bar stool, his faithful friend poured his third shot into his mouth.  At this point a right arm, also complete with hand appeared.  The bartender just shook his head in amazement.  Now that the man had grown two arms and was capable of drinking a shot himself, his friend offered another round so they could take a shot together.  Balancing head and torso on the barstool with one arm, the other arm picked up a shot and toasted his faithful full sized friend and swallowed the shot down.  After the shot, the man looked down to see his right leg quickly sprout, grow to full length and then sprout a complete foot.  Realizing that he was just one shot away from being a complete man, the one-legged man ordered a shot for himself and slammed it down.  Just as expected a second leg grew and sprouted a full sized foot.  The now drunk man leapt with joy!  He jumped around the bar shouting and singing!  He then ran out into the street and screamed at the top of his lungs, jumping up and down yelling “I am complete!” At this point, his friend, the bartender, and some bar patrons had followed him out of the bar and were enjoying the sight of this miracle.  Then, all of a sudden out of nowhere, a large truck came flying down the street and ran over the man, killing him… The crowd was silent.  Then, the bartender said to the crowd “Wow! He should have quit while he was a head.”

The moral of this story, “quit while your ahead”, is applicable to trading.  Too many times I have had the desire for just a little more (some may call it greed).  I’ll have a winning trade that is nearly exhausted and instead of closing it and taking my win, I’ll hold on hoping that I can get a little more out of it (note: “hoping” is not a good trading strategy).  Then before you know it, my win will have turned into a loss.  What also happens is I will hold a position that is a small loss and instead of closing it, I will hold on “hoping” that it will turn.  Usually it won’t turn in my favor (again that “hoping” thing that I tend to do way too often), it normally turns into a bigger loss.  “Quit while you are ahead” is simply stated and easier said than done.  One may point out that at other times you will be told to “give your trade room to breathe” and these trading truths tend to contradict each other.  However, I believe that how you find success is by finding the delicate balance between getting out while you are ahead (or not too far behind) and giving the trade room to breathe.  The best way to deal with this is set rules/guidelines (easy part) and then follow them (hard part).  The difficulty in finding this balance is one reason I am attracted to automated trading.  I am human and no matter how hard I try, I make emotional decisions but algorithms don’t make emotional decisions, they will follow the rule every time.

4.  Flip Sides:  This one is really a step beyond Stupid Thing #3 but in the same family.  In this scenario, I will actually exit the trade after recognizing that it is not going my way.  But then, in my infinite wisdom I don’t take the hint that I have not assessed the situation correctly and take a position in the opposite direction (e.g. I was long, close the trade for loss, and then open a short position).  This almost never works.

I have stated before that timing is the single most important element of trading.  One of the key inputs into timing is psychology (your attitude, emotions, etc.).  The way that you view yourself and the market will impact your entry/exit timing and more importantly, can keep you from entering losing trades in the first place (this is a good thing, most of us tend to make too many trades).  That is why the two key-takeaways from today are 1) understand yourself and 2) respect the market.  How do you put these principles into action? Know the stupid things that you are likely to do and make rules to prevent them.  Maybe this means never making trades from your phone or removing trading software from your phone.  It does mean establishing guidelines for when to close a trade whether it is a winner or loser.   It means setting designated trading times.  It means constantly reminding yourself that trading is hard and the odds are not in your favor.  It means internalizing the fact that every little mistake contributes to lowering your bottom line.  It means remembering that 100% of the trades you don’t take do not lose money.  If all of these things were easy, everyone would be successful traders.

If you haven’t subscribed to our blog yet, you can do it here.  Also, if you want to learn more about trading Psychology, I highly recommend reading the book Trading in the Zone by Mark Douglas.