If there’s one thing that separates winners from losers, it’s the ability to identify trading difficulties and to find ways to solve them. I cannot tell you how many times I have worked with a young trader that makes the same mistake time and time again. Don’t believe me? Ask those traders that kept buying Bitcoin at $19,000, $18,000, $15,000, $10,000, and so on. Obviously, they weren’t paying attention to what the market was telling them, and that is a very common difficulty.
Pay attention to your emotions
Without a doubt, the most important difficulty to tackle is your emotional state while trading. Many psychology books will tell you that profitable trading is all about staying calm. I could not disagree more. I would put it this way: if you find yourself very upset about a trade, it’s telling you that you are doing something wrong. You need to understand what it is that is causing this anger or frustration and face it head-on. If you stuff your feelings under the rug, the market will force your hand eventually. When that happens, it’s typically in the form of major losses or worse yet, a margin call.
One emotional challenge that traders often face is the ability to trust themselves to walk away from the trading terminal once a trade is set. Let’s put it this way: if you have a strategy and you have a set of criteria to and exit a trade as well as an understanding that there is no way that all of your trades are going to be profitable, you’ve done most of your job. I cannot tell you how much better my trading got when I learned to walk away and let my stop loss orders or take profit orders do their job. If you can’t do that, that’s a sign that you don’t trust yourself. If you don’t have the ability to trust your judgment, then you simply must go back to demo trading. You need to pound into your head that you have a positive expectancy, assuming you do, and let the trades sort themselves out over the longer-term.
Another trading difficulty you may encounter is discomfort with your position size. If that’s the case, you will find that it’s very difficult for you to leave the terminal as well. You watch the market hoping to make it go in one direction, or at least cut your losses as soon as possible. We trade to live, not live to trade. If you find that you can’t leave the markets alone because you are nervous about losses, cut your position size in half. If that doesn’t work, cut it in half again. Eventually it will get to a point where you can do the best thing that traders can do: leave the trade alone and let it work for you.
Anger is something that we have all experienced more than once trading and it certainly qualifies as a trading handicap. Most of the time, anger has to do with the market “not doing what it’s supposed to.” What you mean to say is “I thought the market was going to do one thing, but it ended up doing the other.” There’s a huge difference between the statements, as one blames the market, while the other one owns that your analysis wasn’t imperfect. That’s okay; you’re not going to be successful every time you press the TRADE button. If you were, you would drain the market of all of its liquidity as you would win every time. I have found that anger normally means that you have done something that goes against your trading plan, or perhaps you better judgment. Most of the time, that anger is more than likely going to be at yourself, and any type of anger that you show the market is simply projecting.
Lastly, one of the most debilitating trading difficulties that traders often refuse to admit to is tendency to make excuses for losses. It never ceases to amaze me how many excuses the average trader can find. They will say things like “well the big boys didn’t want currency X to move in a specific way, so they simply ran stops.” At this point, I would point out that the average “big boy” doesn’t care about your trading account, as it doesn’t even measure as a blip on the radar. You came into this market knowing that there are much larger trading houses out there, and that you are not going to take out Goldman Sachs by yourself. It’s your job to find out where market forces are driving a currency, and then trade it accordingly. Blaming it on somebody else falls into that victim mentality that only leads to further losing.
So how can you identify your trading difficulties?
I cannot stress this enough: write down everything you are thinking in a trading journal. It’s not just about the setup, it’s also about what’s going on in your mind. Beyond that, you should also make note of what’s going on around you during the day. For example, if you have a particularly horrible trade, and just write down the technical set up, you may find when you read this in your journal a couple of weeks later, you left out the small detail that you had been fighting with your spouse most of the morning. You were emotional to begin with, which of course has its effect on how you trade. You need to keep track of everything that is going on around you.
If you take the time to write down everything that you are doing and what’s going on around you, you can then start to identify patterns as to when you are winning or losing. Granted, nothing is going to be perfect, but if you notice there’s a huge benefit in trading the Asian open, then by all means you should be trading the Asian open. If you find that’s where your edge is, then why would you waste your time with any other part of the day?
By analyzing everything that’s going on around you, the trade set up, the time, the size, and everything else, you will eventually find enough data to give you insights as to how to increase your trading profits over the longer-term. I know it’s a lot of work, but that work will pay for itself over the longer-term.