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.

[MCM 10]

One of the better brief articles I have read....I see myself in a few of the reflections (jumping out of a trade due to fear when it first starts going against me) as well as taking a trade that isnt quite up to my criteria.

 

Fortunately - I am starting at a few coffee rings and crumbs on the desk - so I have hope.

 

Enjoy a good day...thanks for the post.

 

Paul

[DbPhoenix 42]

  MCM said:

One of the better brief articles I have read....I see myself in a few of the reflections (jumping out of a trade due to fear when it first starts going against me) as well as taking a trade that isnt quite up to my criteria.

 

Fortunately - I am starting at a few coffee rings and crumbs on the desk - so I have hope.

 

Enjoy a good day...thanks for the post.

 

Paul

 

You're welcome. And good luck to you.

[Bapovs 10]

One of the better articles i've read sofar.

 

quote: point 6: ''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.''

 

My stumbling block sometimes. It results in this quote: "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."

 

Thanks for the headsup, i guess if you read it alot you eventually will see your mistakes...

[rectav 10]

These are a few words written by Mr Alan Hull, who created the Hull Moving average:

 

" "Buy a rising share- sell a falling share" is all about buying into market that are already rising, which is so painfully obvious that the majority of share traders, ie 85% of them, don't do it. The reason for this is simple and psychological; human beings are counter-intuitive by nature. So, in order to be successful we must be prepared to stop thinking like everybody else"...

[forrestang 10]

This list is really eye-opening. It is wise. I can say that I really have conquered all but #7, and sometimes #5. I think I am willing to put in the work required, I feels as though sound logic is there, I understand that all responsibility for my success rests on the trader's shoulders.

 

Seldom, even with sound logic behind a trade, I sometimes hesitate, hence #5.

 

Also, since I have not 'mastered' the art of trading, the many bumps and bruises I have gained on my path may have led me to be skeptical on any success I may have, hence #7.

 

Thank you for posting this.

[Xiao si 10]

Systematic trading and following your system to the tee will eliminate all of the bad habits.

 

XS

[Bahtiar 10]

Man you're superb! The ability to set forth complex things such briefly, it's splendid. Your article is very helpful, especially for novices. As for me i've found many useful things which will improve my discipline and trading perfomance_ and it's not just words, i mean it.

Thanks a lot for advices, i wish you all success in your activies.

[mohsinqureshii 10]

This Article is Just Awesome. You write it very simple and straight and most of us do the same mistakes again and again. Really if we just focused on our plan and control our emotion we can be successful in this market.

 

Thanks for sharing such a nice thoughts on this forum. I'll be waiting your Next article.

[Rande Howell 10]

The biggest problem I see that keeps traders stuck in mediocrity is their blindness to the need to change from a mindset rooted in predicting certainty of outcome to a probablility mindset where the trader learns to live with uncertainty. It takes internal courage to shift this fundamental biological and psychological bias in perception. Rarely is the mind that brings a person to trading going to be the mind that produces success in trading. The mindset that produces success in other domains of performance based on forcing a will upon the world does not translate well into trading success -- very different animals. Trading effectively demands a probability mindset. There has to be a commitment to personal and professional development so that the trader can use the tools and skills of his trade from a set of beliefs that can manage probability and uncertainty. Otherwise, the trader stays stuck in trying to produce certainty. This takes ontological change which most traders neglect, ignore, or avoid. Out of this resistance to change comes your description of the Seven Habits of Ineffective Traders.

 

Rande Howell

[Strongtrader 10]

  DbPhoenix said:

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.

 

Many thanks for your words!!

In three years i tried almost 20 systems but i wasn't able to be profitable, then i've read some articles about psychology in trading and i understood that was to be the point.

Trading is 10% technics and for the rest 90% is a state of mind.

Rules and analisys are the basics but then you need intuition to apply them correctly, and if you do not have the right state of mind your intuition won't work.

So i worked hard on myself subjecting to a rigorous and patient mental training, and now i'm begining to feel the market and to be profitable with my system.....furthermore i feel another person and i feel satisfied when i trade, even when i get a wrong trade.

Anyway my work is not finished yet, so i'd really appreciate any suggest from you and maybe more material to work on.

[zdo 20]

  mohsinqureshii said:

This Article is Just Awesome. You write it very simple and straight and most of us do the same mistakes again and again. Really if we just focused on our plan and control our emotion we can be successful in this market.

 

Thanks for sharing such a nice thoughts on this forum. I'll be waiting your Next article.

 

We should probably credit Ken Wolff of MTTrader, and not DbPhoenix, for this article.

Not to take anything away from DbPhoenix though – in my opinion, he is hands down the best trading poster ever ! …

[DbPhoenix 42]

  zdo said:

We should probably credit Ken Wolff of MTTrader, and not DbPhoenix, for this article.

Not to take anything away from DbPhoenix though – in my opinion, he is hands down the best trading poster ever ! …

 

I was just about to say. Even though I've corrected this misunderstanding before, it still crops up, largely because of the way these posts are displayed by the TL software. Thanks for clarifying again.

 

As to the earlier question from Strongtrader, click the Trading Log in my signature. At the end of it are links to a couple of articles by Steenbarger that you may find useful.

 

Db

[jwdodge01 10]

Db, I spend a lot of time reading TL posts, but rarely post myself. Your post should be part of every perspective traders learning process. It is right on the mark.

 

Thanks!

[gosu 10]

I haven't seen an article on the "Seven Habits of Ineffective Trading Educators" or even an article on the "Seven Habits of Effective Trading Educators." I don't wonder why. It's better for business to blame the fish for, well, being a fish. Judging by the comments, it looks like the fish are always bitin'.

[kuokam 10]

Thank Ken for writing and DbP for editing and disseminating.

 

 

  zdo said:

We should probably credit Ken Wolff of MTTrader, and not DbPhoenix, for this article.

Not to take anything away from DbPhoenix though – in my opinion, he is hands down the best trading poster ever ! …

[4EverMaAT 10]

  rectav said:

These are a few words written by Mr Alan Hull, who created the Hull Moving average:

 

" "Buy a rising share- sell a falling share" is all about buying into market that are already rising, which is so painfully obvious that the majority of share traders, ie 85% of them, don't do it. The reason for this is simple and psychological; human beings are counter-intuitive by nature. So, in order to be successful we must be prepared to stop thinking like everybody else"...

 

I think I know what Hull was trying to say (in terms of following the masses vs not following the masses), but let me clarify: human beings are intuitive by nature, but due to their domestication (usually as a child or later in life) from other humans with a highly contagious dis-ease of fear, they learn how to become counter-intuitive.

 

And yes, we must reverse or "unlearn" the counter-intuitive behavior, so that we can then regain our personal power and use it in a more effective way.

 

  Xiao si said:

Systematic trading and following your system to the tee will eliminate all of the bad habits.

XS

This is partially true. If the system is "correct" (logical and error free) and produces the desired results, then it is easy to follow a system. Among getting consistent results, a systems approach promotes accountability. So when things are out of place, it's much more detectable and repairable

[rajeshn07 10]

Excellent. Thanks for posting.

[BlueHorseshoe 10]

  4EverMaAT said:

I think I know what Hull was trying to say

 

It's really quite unclear what 'amateur'/losing traders do. Certainly some will always want to buy a market cheaper than where it currently is, and thereby forego the opportunity to participate in many breakout trending moves such as Hull is describing, but another type of amateur will 'chase' the market, buying it once a trend is underway, only to have the trend reverse and stop them out.

 

Where does the problem lie?

 

In my opinion it has nothing to do with entries (which are fairly insignificant) and everything to do with exits. Either of the above approaches can work if properly and consistently applied. But amateur breakout traders are apparently often unable to withstand the large strings of small losses that accumulate whilst awaiting a decent trend, and those who wait to buy a market cheaper are often looking to capture a greater portion of the trend than is really feasible when entering on pullbacks.

 

To trade modern markets effectively in the way that Hull seems to be suggesting requires deep pockets, resilience in the face of sequential losses, and a portfolio approach in higher timeframes.

 

 

BlueHorseshoe

[4EverMaAT 10]

  BlueHorseshoe said:

......

 

To trade modern markets effectively in the way that Hull seems to be suggesting requires deep pockets, resilience in the face of sequential losses, and a portfolio approach in higher timeframes.

 

 

BlueHorseshoe

 

Any trading sequence requires resillience in the face of sequential losses. But that is resilience requirement is minimized significantly when using systems; particlularly automated systems. When using one-off approaches, then yes, much resilience is needed.

 

Deeper pockets would depend on what instrument you are trading. Forex pairs with micro and especially nano lot minimum increments make scaling for the small trader much easier, even with 50:1 leverage.

[TheDude 10]

I think reading stuff like that article is the biggest habit of ineffective traders.

 

From my own experience, focusing on positives and strengths is how we develop, not by focusing on trying to avoid mistakes.

 

A winner has the mind set of always looking to win. A loser has the mindset of trying to avoid losing. There's a massive difference in those 2 mindsets.