Trading is a lot like dating: often you have to make enough mistakes and suffer the consequences when you don't have much on the line before you start making good decisions when you're playing for keeps. Here are some of those bad dating experiences that I find developing traders make with markets, preferably when they're not risking too much of their capital:
1) Short circuiting their process - Most traders develop a "process": a way of looking at market data and gathering information in order to generate promising trading ideas. For the scalper, that process is quicker--with faster-moving data--than for the investor; each has his or her own cognitive style and preferred information sources. When traders short circuit their process, often in order to catch a move under way or avoid a normal adverse price excursion, they tend to make decisions reflexively, on the basis of superficial data and processing. That often makes them part of the herd, and markets don't reward that over time. A great example is getting out of a winning trade prematurely (before it hits its price target), with the idea of "I'll get back in at a better price later". When the better price doesn't materialize, the short-term gain pales beside the missed opportunity. Another great example is rationalizing a losing trade by turning it, on the fly, into a longer-term position.
2) Failing to become aggressive during winning trades - This is something I've noticed about very good traders: it's not so much that they have so many more winning ideas than their peers. Rather, they have a keen sense for when they're right, so that they can scale into those profitable moves. This is different from chasing a move, and it's different from adding to losing trades; they will patiently wait for the market to retrace, and then they'll add to the trade. The losing trader will be threatened by the retracement and will be thinking of exiting altogether. The aggressiveness that led to the trade isn't sustained during the trade. As a result, the average size of winning trades is not so different from the average size of losers over time, limiting overall performance.
3) Easing up after winning periods - When I review trading results with a trader, I like to identify winning stretches and then see how the trader made decisions after those periods of profitability. Many times, the trader will alter how they trade due to overconfidence or just plain sloppiness. Sometimes they'll start trading with more risk, trading more frequently, or trading with less preparation at the start of the day. Successful traders bear down when they see markets well to take full advantage. Many times they'll ask me to make sure that they don't let up. When traders stop doing what has made them successful--particularly when they're telling themselves that they've finally broken through--that's when they're most vulnerable.
I see where SSK is posting "brief therapy" video snippets to supplement his series on "a great day trading". The idea is to use review to highlight your mistakes and turn those into "therapy" goals, even as you review your "great days" and stay in touch with your strengths. Your three common trading mistakes may be quite different from the above list. The key is to know where you can best improve your performance--and then turn that information into a directed program for self-improvement.
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