welcome
Preventable trading errors
As traders we must recognise that there is a degree of unpredictability about the market.
Evidence shows that changes in sentiment although often linked to specific events have a degree of speculation attached to them that may be altered with any one piece of information at any time.
Trading systems providing clear entry and exit criteria based on what is considered to be sound trading practice should in theory for the most part protect the capital when an investor idea moves in an unexpected direction.
It seems logical to have some contingency planning in place as part of this trading system to offer guidance when an unpredictable and so unpreventable sudden severe movement in price occurs to have an objective method of managing such a situation as failure in good decision-making in these circumstances will often compound the associated loss. This may have on-going psychological implications for future investor behaviour.
However, this is not the major cause of poor trading outcomes. More commonly the majority of investors fail to meet expectations or potential due to preventable trading errors in the implementation of systems.
The major damage to trading capital is often caused through failure in appropriate exit, although this is rarely the major focus of many investors where entry is the focus. Having said this it is prudent in the aim of growth as a trader to address all components including exit, entry and sizing decisions if one wishes to tackle preventable trading errors.
The majority of trading errors occur with one of 3 fundamental errors.
1. No such system is in place – Type 1 error
Cause:
Attempt to Short cut success
Lack of belief that they NEED a trading system
No education on why a trading system is important
No education on how to develop a trading system
Solution:
Accept gap
Invest time in learning, creating and testing a simple trading system for every strategy traded
2. A system is in place but is not adhered to or complied with – Type 2 error
Cause:
Don’t believe they NEED to have a trading system
Don’t accept the reality of what is happening in the market
Procrastinate when decision-making (don’t believe in their trading system)
System too complex to follow
System incomplete
System not in place for every strategy traded
Don’t remember to use their trading system in the heat of the moment
Don’t change system as a result of testing and/or formal review
Solutions:
Accept gap
Realign with system as part of overall getting into optimum trading state prior to trading
Have a trading system near within trading area
Formally test trading system to create sufficient weight of evidence in the system
Use results from testing and review systems to amend plan
3. A system is in place but is not tested prior to implementation nor subject to review – Type 3 error
Cause:
Attempt to Short cut success
Lack of belief that they NEED a test or review trading system
Fail to have a testing or review system in place
Do not know how to create a testing or review system
Failure to invest time in test and/or review process
Solutions:
Accept gap
Invest time in learning and creating a testing and/or review of trading system for every strategy traded
Invest time to implement testing and review systems
Evidence shows that changes in sentiment although often linked to specific events have a degree of speculation attached to them that may be altered with any one piece of information at any time.
Trading systems providing clear entry and exit criteria based on what is considered to be sound trading practice should in theory for the most part protect the capital when an investor idea moves in an unexpected direction.
It seems logical to have some contingency planning in place as part of this trading system to offer guidance when an unpredictable and so unpreventable sudden severe movement in price occurs to have an objective method of managing such a situation as failure in good decision-making in these circumstances will often compound the associated loss. This may have on-going psychological implications for future investor behaviour.
However, this is not the major cause of poor trading outcomes. More commonly the majority of investors fail to meet expectations or potential due to preventable trading errors in the implementation of systems.
The major damage to trading capital is often caused through failure in appropriate exit, although this is rarely the major focus of many investors where entry is the focus. Having said this it is prudent in the aim of growth as a trader to address all components including exit, entry and sizing decisions if one wishes to tackle preventable trading errors.
The majority of trading errors occur with one of 3 fundamental errors.
1. No such system is in place – Type 1 error
Cause:
Attempt to Short cut success
Lack of belief that they NEED a trading system
No education on why a trading system is important
No education on how to develop a trading system
Solution:
Accept gap
Invest time in learning, creating and testing a simple trading system for every strategy traded
2. A system is in place but is not adhered to or complied with – Type 2 error
Cause:
Don’t believe they NEED to have a trading system
Don’t accept the reality of what is happening in the market
Procrastinate when decision-making (don’t believe in their trading system)
System too complex to follow
System incomplete
System not in place for every strategy traded
Don’t remember to use their trading system in the heat of the moment
Don’t change system as a result of testing and/or formal review
Solutions:
Accept gap
Realign with system as part of overall getting into optimum trading state prior to trading
Have a trading system near within trading area
Formally test trading system to create sufficient weight of evidence in the system
Use results from testing and review systems to amend plan
3. A system is in place but is not tested prior to implementation nor subject to review – Type 3 error
Cause:
Attempt to Short cut success
Lack of belief that they NEED a test or review trading system
Fail to have a testing or review system in place
Do not know how to create a testing or review system
Failure to invest time in test and/or review process
Solutions:
Accept gap
Invest time in learning and creating a testing and/or review of trading system for every strategy traded
Invest time to implement testing and review systems
Replies to This Discussion
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Permalink Reply by DailyForex on -
Great post, I could not agree more. In fact, I mentioned some of these points in my article "The Common Misconceptions of a Forex Trader". Also, check out "9 Secrets to Successful Forex Trading" Would love to hear your feedback!
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Permalink Reply by Bud Wilkes on -
I autotrade using strategies I have developed. Since I have backtested these I am fairly confident they will work in the future. It is also good to have some real experience with the strategies you are using. This could require several months to years to develop. Don't discount your real trading experience as a guide to what to do.
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Permalink Reply by Mike Smith on -
Agree completely Bud...REAL share market intelligence is not just about what you know and certainly not just about what indicators you use for entry and exit but how you interact with the market as a person with yoru specific set of experiences and trading opportunities..you can only get these invaluable pieces of information through testing a system before you trade, refininf yrou strategy based on that and then review how you perform with it through reviewing your trading experience as you suggest..hvae a great weekeend and thanks for the feedback
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Permalink Reply by Jasmine Wang on -
Agree, if people don't realize this, they eventually will, the longer they trade.
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Permalink Reply by Jeff Weber on
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I offer a trading system - called AIM (Automatic Investment Management) - that avoids all the errors listed above - it's simple, it tells exactly when to buy and sell and how much to buy and sell and it's been tested for many years and it works. I'll be glad to send a free copy of my investing book and a sample newsletter to anybody who is interested: jeffee13@hotmail.com
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Permalink Reply by Jeff Krull on -
I will put it to the test. Come to Hit the Bid.com and say hello. If it's any good I will promote it.
Good luck
HITTHEBID.COM
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Permalink Reply by Mike Smith on
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HI Jeff W,
I am delighted that you have found a system that works for you..however that covers point 1 to a degree ONLY ..the major failure of tadders who are beyond the 'punter' stage is that they invariably have a plan but have difficulty tradding it..the reasons for the are multifold (see next article which discusses this in depth) .
I remain unconvinced that any new system is the 'holy Grail'of trading success..the holy grail if such a thing exists is in the mirror mate.
The standard response to a lack of success is to add another indicator or develp/use a new system..this is transferrring responsibility (or blame if you like) from where it should in that it often rests with the person themselves...
it may not be comfortable to place any errors at your own door but that is REALITY!
If you are having success with your system (and yes it may be fabulous) I congratulate you..it is however mostly due to your ability to follow through and trade it.
the fact that you have some ownership over it probably assists this..and the fact that it is simple is awesome (because again the reality is that the simpler the system the more likely a tradder is to follow through.
Thanks for your contribution and I hope some people do look at it BUT please be carful in terms of encouraging transferring of responsibilty and accountability for trading success to a system entirely rather than the person..
I leave you all with this fact:
IT MAY NOT BE AS SEXY TO LOOK AT YOUR TRADiNG PSYCHOLOGY BT IT IS COMPLETELY NECESSARY
have a great trading week Jeff
Miker
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Permalink Reply by Shelly Ricanati on -
great post! also liked Hillel's articles - shortcuts and fast tracks are definitely not the way to success in this market.
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Permalink Reply by Mike Smith on
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thanks Shelly..agreed Hillels artiles well worth checking out
Mike
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Permalink Reply by Cody Moninger on -
I think the difference between success and failure boils down to honesty. Honesty is the lack of intent to decieve self or others. Thats why I think it is important to keep a trading journal, and to review that journal on a periodic basis. It will keep you honest with yourself. You can also learn alot from it, as everything is documented. Like, what are the reasons why I took this trade? What is my stops? What are my targets? If I write everything down it keeps me in check. If I don't, then I find I usually just do things by the seat of my pants and then I lose money. Sorry if I sound retarded, I'm half drunk writting this. Hope everyone had a good weekend.
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Permalink Reply by Mike Smith on
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Awesone post cody..agree big time..honesty with self is fundamental..delighted to hear you had a great weekend..hop ethings werent to sore on the head front this am for you. great that you were able to share what you have learned..have an awesome trading week mate
Mike
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Permalink Reply by Mike Smith on
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Hey Roger..firslty..congrats mate!! awesome news (what sort of trade - option, share, forex??)
Secondly some awesome points here
Although market sentiment as shown in charts is aweomse in terms of entry (and exit) to ignore basic fundamentals is bonkers..All our clients even the short term traders have in their plan not to enter a directional trade:
a. Prior to earnings announcement
b. Going ex-div
c. Interest rate decsion immenent
d. look at the underlying commodity chart prior to enter a trade on a resource stock
4 simple things that can make a huge difference..there are of course more complex additions and strategioes to trade these particular situations.
The other point you empahaise is the importance of position sizing..absolutely crucial!!
Finally .agree completely continuois learngn is key..if you thin k you have learned it all the market will get up and give you a reminder that perhaps you are not as smart as you thought you were
great contribution and good luck again
Mike
© 2010 Created by Roger Carter.
