Top 10 trading mistakes
January 1, 2011 • Reprints
1 Failure to have a trading plan in place before a trade is executed:
2 Inadequate trading assets or improper money management:
3 Expectations that are too high, too soon:
Beginning futures traders that expect to quit their day job and make a good living trading futures in their first few years of trading are usually disappointed. You don’t become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance to achieve success in any field of endeavor, and trading futures is no different. Before dreaming of becoming a successful full-time trader, you should first work on becoming a successful part-time trader.
4 Failure to use protective stops:
Using protective stops upon entering a trade provide a trader with a good idea of about how much money he or she is risking on that particular trade, should it turn out to be a loser. Protective stops are a good money-management tool, but are not perfect. Limit price moves in futures markets can blow right past protective stop orders. The recent higher price volatility in the commodity markets has made stop placement a trickier endeavor, but protective stops are a prudent money-management tool. Added volatility highlights the importance of using stops and should not be used as an excuse to avoid them. Slippage is a fact of life in trading and should be worked into the equation. Understand that you will not always get filled at your stop price on losing trades and plan accordingly. Remember that there are no perfect money-management tools in futures trading.
5 Lack of patience and discipline:
While highlighting these virtues has become cliché, when determining what unsuccessful traders lack, not many will argue with their merits. One classic example of trader discipline in trading markets lies with the rally of the U.S. stock index futures that occurred early last autumn. Veteran traders know that the months of September and October are historically bearish for the stock indexes. However, the stock indexes last fall powered right through those historically bearish months and set fresh for-the-move highs on a regular basis during that period. A trend trader exhibiting the discipline to continue trading with the trend and the patience to let the market tell him or her when that up-trend had ended, would have booked sizable profits during a period of several weeks. Other, less disciplined traders may have just bet on the hunch that markets were headed lower in September and October, without making the market show them technical evidence of such. Also, don’t trade just for the sake of trading or just because you haven’t traded for a while. Let those very good trading set-ups come to you, and then act upon them in a prudent way. The market will do what the market wants to do — and nobody can force the market’s hand.
6 Trading against the trend — or trying to pick tops and bottoms:
It’s human nature to want to buy low and sell high (or sell high and buy low for short-side traders). Unfortunately, that’s not at all a proven means of making profits in futures trading. Top and bottom-pickers usually are trading against the trend, which is a major mistake. The 2010 rally in the precious metals markets, in which gold futures hit an all-time high and silver futures notched a 30-year high are prime example of markets that continued to show solid up-trending price moves despite moving into the stratosphere. Would-be top pickers in the precious metals markets were brutalized in 2010.
7 Riding losing positions too long:
Most successful traders will not sit on a losing position very long. They’ll set a tight protective stop, and if it’s hit they’ll take their losses (usually minimal) and then move on to the next potential set-up. Traders who sit on a losing trade, hoping that the market will soon turn around in their favor, are usually doomed. You can make adding to a loser 7B. There is a tendency to want to price average down on losing long positions (or up on losing shorts) because if you like, say, corn at $3.50, you’ll love it at $3.25. This is often a bad idea and always dangerous.
8 Over-trading:
Trading too many markets at one time is a mistake, especially if you are racking up losses. If trading losses are piling up, it’s time to cut back, even though there is the temptation to make more trades to recover the recently lost trading assets. It takes keen focus and concentration to be a successful futures trader. Having too many irons in the fire at one time is a mistake.
9 Failure to accept complete responsibility for your own actions:
10 Not getting a bigger-picture perspective on a market — both technically and fundamentally:
Jim Wyckoff is the proprietor of the analytical, educational and trading advisory service, "Jim Wyckoff on the Markets." He has a website at www.jimwyckoff.com and his email address is jim@jimwyckoff.com