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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