Now that the holidays are over, the fiscal cliff has been avoided (for now) and the markets are beginning to get back to normal, we thought it would be helpful to take some time and publish a series of posts on mistakes traders tend to make and how they can be avoided. This series of posts will not cover every landmine in the financial markets, but we feel it will be very helpful for those interested in trading stocks, futures, options, forex or Nadex. If you were to google trading strategies, you would come up with 33,600,000 results. This leads us to one of the mistakes many new traders and investors make.
Trading Mistake #1: Not respecting the time you have to put in to learn.
Through the TradingPub, we have had the opportunity to host hundreds of free trading education events. While some of the strategies covered might have more merit than others, it would be near impossible for one person to try to implement every single strategy they heard. The first thing to understand, is that trading is not an easy thing. There is not a magic formula or piece of software that will substitute for time spent in front of the screen and lessons that you will have to learn. Many new traders are in search of this holy grail and jump from one trading strategy to the next without ever taking the time to perfect a strategy.
The following question comes up again and again, "How long will it take me to be a successful trader?" The answer is always the same... it just depends. The majority of traders based on our experience go through the following cycle:
Learning Phase Cycle for Traders who Succeed:
Phase 1: The Initial Struggle
Phase 2: Treading Water
Phase 3: Glimmer of Hope
Phase 4: Setback
Phase 5: Consistency
You will notice we did not put any timeframe on the 5 different phases a trader goes through in order to succeed. Some traders might be able to do it in a year, some less, most more. Let's take a look at each phase:
Phase 1: The Initial Struggle:
We said it before and we will say it again, trading is not easy. Sometimes in our events, just to get the point across, we will feature a poll that asks the following question:
Is trading easy?
Answer a: Yes, it is an ATM and I print cash out of my computer every single day
Answer b: No, trading is difficult but I am working hard
You can guess how people answer... typically it is 98% in favor of answer b. There are so many moving parts to trading and investing in today's market that it is easy to understand why traders struggle. The key in the beginning is to make sure to crawl before you walk. Imagine we decided that we wanted to be a professional medical care provider. It involves more than leasing office space and giving out medical care. We would have to learn about medicine, spend years in school, follow that with years in a residency program to "learn in a live environment" and then finally we would be a medical professional with years, blood, sweat, tears and dollars traded for the opportunity. The same thing holds true in trading. It is very important to spend time learning and this is where a paper trading account comes in handy.
Here is the TradingPub's official "Rule of Sim" when it comes to a paper trading account (known as a simulated or sim account)
" If you make money in a sim account, this does not necessarily mean you will make money in a live account. If you do NOT make money in a sim account, it DOES mean that you will not make money in a live account."
So many traders want to jump right into the market. Spend as much time as possible in a simulated account but try your best to treat it like a live account. This is where many people go wrong. They are trading "funny money" so immediately instead of trading 100 shares of stock or 1-2 futures/options contracts, they trade 1000 shares or 20-30 contracts. This is unrealistic for a beginning trader. Once you get to a point of having several successful weeks (not days but weeks) in your simulated account, then you can begin looking at trading live. The key is to put in the practice time, learn the platform, find out what kind of mistakes you make analytically and managing the trades BEFORE you go live because once you go live, it is a whole different ballgame.
During phase #1, you will probably have the following occur:
- Trade Errors that cost you money because you mis-clicked or left orders working
- Have large losses and small gains creating a net loss
- Miss out on really good trades, enter too late and then lose money
- Move your stop away from the market creating a larger loss than expected
- Think... How will I ever be able to do this.
All of the above scenarios are things that will go through your head during the first phase of trading. The key is to make these mistakes, learn from these mistakes but also to trade small enough that these mistakes do not completely wipe out your trading account.
The best thing to do during phase #1 is to keep track of your trades on a spreadsheet. If you do not have a spreadsheet to do this, simply try the following. Open a spreadsheet and include the following columns:
Date Time of Day Market Traded Entry Price Exit Price Gain/Loss Reasons For Entry/Exit
If you will keep track of this page after each and every trade you will have a leg up on many traders who do absolutely no homework and research on their own trading. You also might pick up on patterns like, "My losing trades are three times as much as profitable trades" or "I trade well in the afternoon but horrible in the morning" or "I make money in options but lose it all in futures." These types of things will help you hone your skills as a trader, exploit mistakes and become a better trader or investor in the market. Once you are able to do this, you can say goodbye to Phase #1 and begin treading water (which will be covered in our next post)... Also, we are having a big educational event on Saturday, Jan 19th and we would love for you to be there - Learn More Here