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In today’s episode, you’ll discover the top 5 trading mistakes that you must avoid.
So listen to it now…
Resources
Why You Lose Money with Trading Indicators
Trading as a Business — The Essential Guide
Transcript
Hey, hey what’s up my friend?
Welcome back to today’s episode where I’ll be discussing the top 5 trading mistakes that you want to avoid.
Mistake #1: Relying on other’s trade ideas
Nowadays with social media, information is abundant and traders tend to get carried away with trading analysis from other traders.
Someone might post a chart in a Facebook group and say something like, “Oh, I’m looking to buy because this market is in an uptrend and a hammer has just formed.” Then you look at that chart and go, “It looks really bullish, it seems like a good trade, let me buy as well.”
But here’s the thing. If you were to just follow someone’s opinion, someone’s idea or someone’s analysis, then you’re doing it wrong because you’re trading without a plan.
That person might be a profitable trader but you can be sure as hell, that person is not going to tell you when they’re going to exit the trade. They won’t be telling you things like:
- How they’re going to manage the trade if it goes against them or if it moves in their favour
- How they’re going to scale into or scale out of their trades
- They changed their minds and not take the trade altogether
And this is a problem. If you follow someone else’s opinion, if you’re trading without a plan, then this is not trading. This is gambling. Because you’re putting yourself at the whims of someone’s else’s actions.
Don’t make this mistake. People can post all the charts they want, post all the analysis that they want. But again, it doesn’t mean that you have to follow them. You’ve got to have your own plan and trade your plan and not someone else’s plan.
Next…
Mistake #2: Being too short sighted
To make money in trading, you got to think long term. You got to have an edge and execute your trades consistently over time.
This means that in the long run, you might have a winning system, but if market conditions are not favourable in the short run, then that winning system will go into drawdown and produce a series of losses.
Only when market conditions go back in your favour, will that proven system start making money. The lesson here is that you got to look at your trading system for the long term.
How has it performed over the last 500 or the last 1,000 trades? How has it performed over the last 5 or 10 years? You can’t just judge whether a system works based on 5 or 10 trades. It doesn’t make sense because the results are random.
You need to judge a system based on a large sample size of trades. That’s the point I want to drill. Don’t get caught by the short term results to the point you come up with a wrong conclusion and abandon the system to look for something else.
Because if you have a series of losses with the new system, you’ll abandon the system again and you’ll be stuck in this cycle forever.
Mistake #3: Paying attention to the news
Some traders might disagree, but I would say it’s a mistake to be paying attention to the news if you’re a new trader, especially if you trade the price action of the markets. And why is that?
If you’re a price action trader, then you have to agree that the price accounts for everything. There’s no way to predict whether the news will cause the market to go up or down.
For example, now we have the COVID issue around the world, and we have the racism issue in the US. But guess what, the US stock markets are still approaching the all-time highs. It’s the bull market now and the NASDAQ is almost at the highs already.
How do you explain this based on fundamentals? Well, you can’t this is why, as a new trader especially, you should forget about the news out there. Those are noise. Instead, just focus on the price – because the price is what pays.
If you buy something at $15 and you sell at $20, then guess what, you’ll make money. The price is what pays. If you buy something at $15 and you sell at $10, then you lose money.
So the price is what matters, just focus on the price. Don’t get bogged down by all the new, all the media out there, because it will just confuse you and make you frustrated till you get analysis paralysis and you end up making the wrong decisions.
Moving on…
Mistake #4: Expecting to make $X a day
Don’t try to make $X a day. Many traders have this very ambitious goal but try not to show it.
I get this very often, “Hey Rayner, I’m not greedy. I’m just looking to make $20 a day to just pay my meals.” $20 might seem very little, but what’s a lot to ask for is the “a day” part, which is consistently making money from the markets.
Because here’s the thing, every trading strategy out there works only in certain market conditions to exploit that inefficiency in the markets. If you want to make $20 every day, that’s like saying that your trading strategy works every single day.
Let me ask you, do you know of any trading strategy that works every single day? Yes the $20 is an insignificant amount. But to have a trading strategy that works every single day so that you can make money every single day – simply doesn’t work.
Because market conditions change. It goes from an uptrend to a downtrend or a range. How do you expect a trading strategy to work in all market conditions? It doesn’t work that way, it doesn’t happen. At least not that I’m aware of.
So forget about the expectations of making $X a day. If that’s what you want, get a job, not get into trading.
And lastly…
Mistake #5: Looking for the best strategies or indicators
I know the strategies, the chart patterns, the signals, are all sexy things to talk about. But guess what? The stuff that makes money in the long run are proven trading concepts, like trend following, mean reversion trading, price action trading.
These are trading concepts that work. Forget about all the different strategies out there, forget all the other chart patterns. Instead, immerse yourself in the different types of trading methodologies that are out there in the markets.
For example, Warren Buffett is a value investor. Clearly, that works for him. Carl Icahn is an activist, and that works for him. For Jim Simons, quantitative trading and HFT works for him. For George Soros, macro trading works for him.
You got to find the concepts of their work and then develop trading strategies around it. Don’t jump straight into the strategies or the patterns without understanding the concept behind the strategy.
Because if you have a trading strategy that’s built on the wrong concept, then it’s unlikely to work for long. But if you have a sound proven trading concept, then from there, you can build multiple trading strategies across different timeframes.
And that makes your trading life that much easier.
Here’s a quick recap…
Recap
- Don’t follow the analysis of other traders because you don’t know what their plan is.
- Don’t think in small sample size.
- Don’t pay attention to the news.
- Don’t try to make $X every single day because it doesn’t work that way.
- Focus on the trading concepts, not the best indicators, not the best patterns.
With that said, I’ve come to the end of this episode and I’ll talk to you soon.
