Thursday, 20 July 2017

How Trading Success Can Lead to Trading Failure



Hello Traders.

You’ve probably clicked on this blog post just so you can find out how I can possibly spin being successful at trading into something that can be damaging. I know it sounds ridiculous, and it is ridiculous. However, I see it happen over and over again, and it still tries to creep in on me most months. The reason I’m writing this now is because I felt it earlier today. Lucking I am mostly able to recognise it now and discard it before any damage is done. However, for a lot of beginners, they can end up in a lot of trouble before they even know what happened!

So, how can success lead to failure?

It comes down to the natural triggers of the brain that cause such hardship when learning to trade – greed, fear, laziness etc. It may sound crazy, but the truth is that having a run of success can actually make it easier to fall into emotional trading and mistakes.

What happens is that you sit down at your computer each day with your trading plan well laid out. You are determined to succeed, to trade like a professional and make your dream of becoming a professional trader a reality. And look at you, you start doing just that. You trade properly and the winners start racking up. You have a fantastic week. Maybe you even smash it out the park for an entire month.

And then your mind comes along and tries to ruin it all (and often succeeds). That self-destructive aspect of your personality starts fighting for purchase. You’ve spent so long learning about emotional trading and ways to cope with it that you don’t even see it coming. And the reason for that is that you have spent your time looking at only one side of the coin.

Emotional trading can come after losses. It can spiral out from there and cause you to blow entire accounts. However, it can also come after winning trades.

After periods of winning at trading, your discipline starts to weaken. You begin to think things like:

‘This setup isn’t perfect, but I’ve had so many winners that I can afford to take a couple of extra risks.’

‘This isn’t one of my setups, but I know I am much better at reading the market now. I’m doing really well so I can just start to use my instincts alongside my trading plan.’

‘If I can just have another two successful trades this month, then I will make X amount, which would be great!’

The mind is a sneaky little sh**, there’s no doubt about that. These thoughts start digging their way in, like a flanking manoeuvre, understanding that you have defences against ‘normal’ emotional trading, but not this.

And what happens?

You take a poor trade. And if it’s really bad, then you take more than one, wiping your months gains all the way back down to zero (a subscriber actually told me had done just that only recently).

I was looking today for a short on the FTSE 100. The market was sitting in one of my resistance zones and holding tight at 7485. It even produced a couple of nice little pin bars for me. All signs were a go.

Except they weren’t at all. It was only that part of my mind that was trying to blind me and suck me into the trade. Because I have had a good run recently, and am on for a good month. However, the temptation is there to just look for another couple of winners, and turn a good month into a phenomenal one.

Now I knew that the EU rate decision was due less than 15 minutes after I started seeing signals. As a rule, I do not trade around rate decisions due to the possibility of sudden, unexpected wild swings (I got stung badly as a beginner. Never again!). I also had a management point just below where the entry would be, too close for a trade really.

And yet there I was running through my checklist as though I were going to take the trade. I could hear mutterings from the depths of my mind with things like – ‘it looks like s small double top,’ and ‘the rate decision probably won’t do anything, this once will be fine.’

It actually amazes me that there is such a strong drive for self-sabotage within us. Even when we KNOW that acting in a certain way will harm us and our goals, at times we are driven to do exactly that. And the worrying thing is that the temptation is so real and the reasoning so convincing at the time.

So yes, success can lead to failure in trading. And it can happen very quickly.

What can you do to avoid it?

Well first of all, realise that the problem exists in the first place. And by reading this blog, you should now have an understanding of what is going on.

After that, you need to do things to strengthen yourself against those kinds of mistakes. Here are a couple of suggestions and the reasons ‘why’ for each:


1)    Do not keep track of your results after every trade. By doing so, you are keeping a running tally and the mind has a tendency to get ‘locked’ on easy to digest figures. If you’re up three percent, maybe you’ll start thinking that you want to aim for 5. If you’ve made £1,800 for the month, maybe you’ll decide you want to shoot for £2,000.

2)    Cover the portion of your screen that displays your gain or loss when in a trade. By that I mean both in terms of money, and also points. This will take away the similar temptations that arise when in trades that are similar to the points in number 1. The temptation is always there to hold the trade until you get from 8 points to 10. Or you don’t want to exit until it pops back to break even.


3)    Have a checklist. A literal, printed checklist of all the things you need to see before you enter a trade. Maybe it’s a list of 8 things and you need to be able to tick at least 5 before you can enter. Whatever fits your trading plan, make sure you have it right next to where you trade. That way, no matter what you are thinking, you have the sheet to fall back on. If it doesn’t fit, it doesn’t fit.

4)    Take breaks from the computer. Force yourself to take a lunch break. Consider a mid-morning ten minutes away from the charts. Do the same after lunch at around 2pm. The main reason you take imperfect trades, is because you are becoming frustrated and searching for setups. You ‘want’ to be trading, so the longer you sit without trading, the more likely you are to jump into that imperfect setup. Taking a break helps relieve that pent-up frustration.

Just remember, whenever you are trading – this is you doing what you either already consider your career, or what you hope to one day call your career. You need to take this seriously if you want to succeed. The problem with trading is that it is literally just you and the charts. There is no boss over your shoulder telling you what to do. You don’t have other staff members giving you input and advice. It all rests on your shoulders, and that makes it both incredibly tough and also makes it much easier to make mistakes. Your broker will accept your order with open arms, whether it is right or wrong. Your job is to make sure that you only risk when the cards are stacked in your favour.

I hope you’ve all had a great trading week.

James Orr

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