Sunday, March 14, 2010

The Mistakes That Traders Make

What are the most common mistakes that traders make?

Kel Butcher has come out with a new book that offers perspectives on this issue from a variety of people who work with traders, including Van Tharp, Larry Williams, Jake Bernstein, and yours truly.

The mistakes include everything from poor risk management to allowing emotions about the last trade to affect the next one. It's a very practical introduction to trading psychology: how trading impacts psychology, and how psychology can influence trading decisions. Among the specific topics covered are making entries into positions too complicated; paying big money for questionable trading systems; mixing time frames and strategies; failing to have a clear exit for positions; lacking a clear trading plan; overtrading; and jumping into the market before developing proper skills.

Taking the advice of the 20 chapter contributors could save a new trader considerable money and grief. Kel does a nice job in each chapter of weaving together the material offered by the contributors.

My own chapter? The mistake I chose was failing to align one's own trading strengths. Many traders so focus on what is *not* working in their trading that they never get around to identifying and building on their strengths.

A trader recently explained to me that he was basically breaking even in his trading. His winning trades were larger than his losers by a good margin, but his percentage of winning trades was relatively low. My advice was to investigate his winning trades closely--the setups he was using, the times of day he was trading, the market conditions at the times of the trades--so that he could identify clearly what was working for him.

By process of elimination, this also would help identify where a majority of his losses were occurring.

The idea, however, is not to improve the losing setups or to get him to trade better in (for instance) slow market conditions. The idea is to simply stop trading the losing setups and conditions and focus his business on where he is profitable. By aligning with your strengths, you can can expand what you do well and not become mired in areas of relative weakness.

The more you know about your trading--the good as well as the bad--the better you'll be able to guide your trading as a business.