Tuesday, October 27, 2009

Three Reasons Traders Don't Make More Money

Here are three common problems that I've observed among experienced, talented traders who are struggling to get to that ever-beckoning next level of performance:

1) Position Sizing - They don't take their largest risk when they have their greatest feel for the market and conviction about direction. Very high confidence trades may be sized relatively small; lower confidence trades are sized too large (often to make money back from earlier losses). They are taking their biggest cuts at the plate when the ball is out of their strike zones;

2) Execution - They wait for markets to go up before they buy and to go down before they sell. As a result, they get in at prices that leave them unusually subject to pullbacks. Many times, particularly if the trades are sized large (see above), the heat will take them out of good trades. In short, they're not patient about getting into positions; they chase moves, fearful that they'll miss a profit opportunity;

3) Rigidity - They don't adapt to changing markets. They look for big moves in markets with declining volatility; they trade breakouts when signs point to range conditions. They set stops and profit targets in ways that don't adapt to shifting volatility. They expect the market to accommodate what they're doing rather than vice versa.

How much money you make is a function of what you trade and how you trade it. Many traders will switch what they trade (markets, stocks, time frames), only to continue making the same mistakes outlined above. Getting into good risk/reward trades and then maximizing the risk/reward while the positions are on is a major driver of long-term trading success.


fiki said...

personally the biggest killer is patiens or fear of missing out. i make a plan everyday but I almost never stick to it. at the end of the day when I write my journal its always the same. IF i had followed it it would be a nice profit or no loss. always to early...

David said...

The bottom line: trust in yourself. You hit the nail on the head-as usual. CHTrader

Matt said...

An other Key -- is learning to take profits when they are on the table. New Traders get greedy when a trade moves in their favor and attempt a home run --- learn to take profits. Scaling out and learning to move up your stops is a good way to start this.