Seven Habits of Ineffective Traders

[DbPhoenix 42]

By Ken Wolff

 

Recently, a couple of people I know packed up and quit trading after struggling for a long time to hold their heads above water. They didn't make it. This isn't unusual, of course. This profession has a high failure rate. But it frustrated me.

 

It frustrated me because I could see potential in them. I don't believe you have to be particularly talented or intelligent to be a successful trader, but these people seemed to have a grasp on the market and the love of trading that's necessary.

 

They had the tools, the knowledge, the time and the funds. It also frustrated me because I could see the pressure they were under that contributed to their failures. Most of all, though, it frustrated me because I could clearly see what they were doing wrong, but they couldn't stop repeating the same mistakes.

 

This happens a lot. I see a lot of people making the same mistakes. So I thought I'd share my list of the seven most frustrating things that struggling traders do.

 

1. When people won't do their own homework. Too many people want to make money, but aren't willing to put the time in and do what it takes. I love answering questions, and I have a passion to help people learn, but when I notice someone asking the same questions over and over, and they are basic questions that anyone could Google, and gave it 30 seconds worth of effort, I know that person is lazy and probably won't make it.

 

You want to know what makes successful traders? People who glue their butts to their chairs. Look at their computer desks and you're likely to see lots of coffee rings and crumbs. You get out of something only what you put into it. If you aren't willing to take notes, take some initiative, keep a journal and spend a lot of time watching stocks, I don't see much hope for you as a trader.

 

2. When people can't explain their reasoning for a trade. If your reason for entering a trade is something vague like, "I thought I saw buyers, and last week it had news, and I dunno, it just looked good," then you don't belong in that trade! People like this usually have no clearly conceived, written, organized trading strategy because they are lazy. They are doomed to failure.

 

If you have no solid reason for a trade, you will have no confidence in it. You will wind up mistiming, misjudging, fumbling and losing. Here's a quote from my partner Phil Rosten, who is a brilliant technician:

 

I think the most important thing to do is to develop a system that you have confidence in. You will get nowhere if you are second-guessing what you are doing. When the market is open, you need to know what you are doing, and why you are doing it, without thinking too much about it. If you start thinking too much about what you are doing or second-guessing yourself, you will quickly get taken out of the game.

 

Believe it or not, it doesn't matter much what your reason is, as long as you are consistent with that reasoning. But you'd better have a reason.

 

3. When people make things more complicated than they need to be. Let me give you an example. One of the leaders in my chat room finally unveiled a new trading system he had developed after more than a year of extensive testing. The system works just as it is. It isn't perfect (no trading system will be 100%), but it is highly profitable.

 

People's initial reactions were interesting. Instead of saying, "Wow, great. Let me give it a try," a common first response was, "I wonder if it would work even better if we changed this and that, and instead of a 15-day moving average we used a 10-day moving average," and on and on. Before they even tried or understood the system, before ever becoming profitable and successful with it, they immediately set about trying to improve it.

 

Maybe it's human nature. We love trying to reinvent the wheel. Many of us see trading as a puzzle. If we could just find that solution or formula that no one else has thought of yet, we would be rich and happy. A lot of people think that the more indicators they pile on, the better their trading results will be. So they wind up with analysis paralysis, unprofitable and frustrated, convinced that trading is an unwinnable gamble.

 

I can't say this enough: What matters is not the system itself, but what you do with the system -- your discipline to use it and keep stops. You won't find a system that always works, so you'd better limit those losses. Two percent of your trades can easily wipe out 98% of your gains if you can't keep stops.

 

4. When people enter a trade for a good reason, then lose their nerve and exit too soon. This is a lot like walking across a log over a river. If you keep focused on your goal, you will get to the other side. You know how to walk a straight line, and you would have no problems if the log was on the ground. But once you are out there, if you start second-guessing yourself and looking down at the rocks below, you will fall. Too often emotions set in and sabotage good trades.

 

If you have a reason, stick with it. Stay in the trade until your target is reached, you have an exit signal, or the reason for your entry is no longer valid.

 

5. When people hesitate, or follow others, and enter a trade too late. I understand traders' lack of confidence and I can empathize because I've been there. If they don't get a grip on it, though, it will be their downfall. Calls are great and gurus are great, but if you follow, you will always be late. You need to learn to rely on your own reasoning. Otherwise you will be too slow and you'll become fish bait.

 

Inexperience is often the reason for this, and that will take care of itself with time. That's why I recommend starting with small shares until you gain confidence in your system and your ability to keep stops. But this problem frequently has to do with deeper emotions, pressures and self-esteem problems that may not go away as easily.

 

This is hard stuff because it's all about confidence. When you are under pressure from a spouse who disapproves of your trading, or under pressure to pay bills, etc., you are working under an enormous amount of fear and pressure. And that is automatically going to cause hesitation. I know that's a hard situation.

 

But I tell you, if you don't get that under control and learn to trade like you don't need the money -- with control and a system, leaving out emotion -- you are not going to make it. You must find a way to ease that pressure. Get a part-time job if things are that rough and you still believe trading is the job for you. If you cut back and trade a couple of days a week without the pressure, you'll probably trade better for it and wind up making more money than you did trading five days a week under pressure. I've seen it happen many times.

 

6. When people will not contemplate the real reasons for their failures. I don't know how many times I have heard this: "The market was tough today. I had one good early trade and then gave it all back in the afternoon in a few bad trades."

 

Let's be honest here. The market wasn't making you do those stupid later trades. It was you. Don't blame it on the market when in reality you were chasing longs all day when the market was tanking.

 

Then people will say something like "I need help with risk management," "I need help learning to find good entries," "I need help learning executions" or some other topic not really related to their true mistake. What they need instead is a dose of self-restraint and some personal accountability. They need to stop making trades out of boredom, frustration, regret or any other reason other than "it met my trading criteria." They also need to be honest about these criteria and not stretch things into "well, it kind of meets my criteria -- if I look at it cross-eyed."

 

I know this is hard. It's tough to sit there all day and stare at these numbers, especially when things are slow and there have been no good trading opportunities that day. It's like fishing. Fishing can be really boring. But if you aren't sitting there waiting with your hook in the water, you won't catch anything when the big fish come by. And it won't help if you jump in the water every time you see a ripple, trying to convince yourself you had a bite.

 

7. A defeatist attitude, especially in me. The potential in our lives far exceeds what we ordinarily imagine. Too often we put limitations on ourselves with Eeyore-like thinking. We say "I can't do this" or "I am just not smart enough" or "I'm just unlucky." In doing so, we fail to challenge ourselves and develop new potential because we've lost faith in ourselves.

 

We are like circus elephants tied with small weak chains to a stake, believing we could never get free, unaware of our own strength. We possess tremendous potential, but if we develop the bad habit of convincing ourselves that our potential is limited, we will not actively challenge ourselves and grow. Like the elephant, we will be held captive by our own beliefs.

 

If you have a defeatist attitude, you've already lost. So let's keep a positive mindset and try to see each mistake as a stepping stone to growth.

[smwinc 20]

Really think that is a great post. Respect DB.

[darthtrader 10]

Steenbarger made a good point in reference to #3. If you gave people a system that is guaranteed to make 40% a year, but it only trades 4 times a year and only holds each trade for a half hour, most people would tinker with the system and ruin it. Its not because people want to make the system more complex, its because trading is filling a "need" outside of making money and you wouldn't know what to do with your time waiting for the system to trade. While an extreme example its good to think about as far as keeping things in perspective and what the goal truely is.

As far as keeping things simple, I think this idea gets confused with keeping things simplistic. You obviously want to cut the fat and use occam's razor when judging a trading idea but that doesn't mean that keeping things simplistic is the optimal way to view a trading strategy against something as complex as the markets.

[torero 10]

Excellent post! Great summary and examination of each point. Bravo!

[jessechan 10]

I like #4: the use of walking a log over a river to explain the reasons why most traders (including me:crap::doh:) fail to let profits run, what a provoking analogy! Thanks very much.

[DbPhoenix 42]

I like #4: the use of walking a log over a river to explain the reasons why most traders (including me:crap::doh:) fail to let profits run, what a provoking analogy! Thanks very much.

 

It's difficult to pick and choose what are most important in this article. Whenever I've tried, I end up bolding practically the whole thing. There are few if any wasted words.

 

But with regard to #4, one must not overlook the following: "Stay in the trade until your target is reached, you have an exit signal, or the reason for your entry is no longer valid." In the Zen thread, there was mention of novices wanting results now, e.g., if they sell something short, they not only want it to drop immediately after the entry is triggered, they want it to plummet. Even though they may intellectualize that this is unreasonable, they still freak as soon as the stock or whatever pauses, much less begins to retrace. They simply cannot wait for a wave of any length or depth against them to expend whatever energy it may have and ride the resumption of the move they traded in the first place. They admit the unwelcome thought that they really don't know what they're doing or what they're looking at and they bail.

 

All of which is why one must preplan every trade and be very clear about what to look for. Otherwise, one will either resort to cutting profits short, or sit there, frozen, letting a reversal signal go by unheeded while his profits turn to losses.

[torero 10]

I think the problem is that what we hold as something positive in society is in fact a fallacy in trading. Take instant gratification, which marketers tout as a right by consumers. Patience take a back, this is a virtue that is lost but very difficult to overcome because we've been conditioned for so long practicing this vice. This is the reason why many cannot and will not succeed by taking profits to early, which will end their overall winnings in the long run. Of course, by taking profits early invoke other emotion, regret, shoulda woulda coulda mentality which later on cause more anxiety and reckless trading (chasing, etc).

 

There are other habits that need to be suppressed or overcome in order to succeed.

[TacTrader 10]

Good point Torero...

 

I have a hard time with this issue and I find that scaling out helps tremendously. By taking off a part of my position early I can satisfy that need for instant gratification but still have a position in place for the bigger move. Helps for me even if it isn't "optimal"...I may miss some profits by not having a full on position the entire trade, but my mind is at ease which has value as well.

 

FWIW

[torero 10]

I agree and I do it as well. By scaling in and out, it deters the trader from moving quickly into the opposite side (from long to short and vice versa). Markets don't change trends that quickly so the best way to ride it and stay on the same trend until the profits are reducing or no longer coming in, then it's time to bail and wait for the other direction to set up. Some may not advocate scaling in and out but it keeps you in the trend better than if you don't scale.

[TacTrader 10]

Exactly...

 

I do not scale in, only out. I have tried to scale in before and even though it worked on the profitable trades, I felt more inclined to do it when the position went against me and I still wanted in the trade (cost averaging). I am really focused on playing defense and sticking to the "cut your losses and run your profits" idea. Since starting that I have really seen a difference in my P/L.

 

CYA

[NeoTrader 10]

Awesome analogy regarding potential. Becoming a captive of your own beliefs is something I believe everybody does at some point and few break free. This is especially apparent in the markets. Excellent post DB.

[Palatine 10]

By Ken Wolff

 

I know this is hard. It's tough to sit there all day and stare at these numbers, especially when things are slow and there have been no good trading opportunities that day. It's like fishing. Fishing can be really boring. But if you aren't sitting there waiting with your hook in the water, you won't catch anything when the big fish come by. And it won't help if you jump in the water every time you see a ripple, trying to convince yourself you had a bite.

 

"It's like fishing." Great metaphor! Thanks for the post.

[MRW 10]

There's nothing I can say that others haven't, DB, but will add my thanks!

[dementyia 10]

This is a really great collection of tips that will be highly useful to me when I start trading real money. Thank you!

[abramo 10]

.

 

adding my own gratitude to people who take the time to put "on paper" their experience and advice. they provide us with a chance of becoming better.

 

thanks !!

 

.

[rbhsb 10]

great collection thanks

[Minis Trader 10]

I think the problem is that what we hold as something positive in society is in fact a fallacy in trading. Take instant gratification, which marketers tout as a right by consumers. Patience take a back, this is a virtue that is lost but very difficult to overcome because we've been conditioned for so long practicing this vice. This is the reason why many cannot and will not succeed by taking profits to early, which will end their overall winnings in the long run. Of course, by taking profits early invoke other emotion, regret, shoulda woulda coulda mentality which later on cause more anxiety and reckless trading (chasing, etc).

 

There are other habits that need to be suppressed or overcome in order to succeed.

 

Other habits such as The Superman Complex, a trader gets a few winners in a row and they feel they are Invincible.