Often, as traders we have periods where everything seems to go well and we have one winning trade after another. And then, there are these times when nothing seems to work and you give back all your profits, and then some. Or how often has one bad trade wiped out all your previous gains? Often, these periods of ‘bad luck’ could have been avoided by asking the right questions about your own trading and risk management.
In the following article we give you 4 questions that you should always ask yourself when your trading seems to deviate from the norm.
Are you impeccable?
Question 1: What’s the motive behind increasing your position? Are you really a better trader? Is failing really impossible?
We are starting with one of the biggest amateur mistakes traders make. In winning streaks, traders tend to increase their position size because they believe that their trading strategy is all of sudden unfillable or they believe that their ‘gut’ feeling is telling them what the right thing is to do.
“In a storm, even turkeys can fly.”
Winning streaks are normal and they will happen to all traders. The worst thing you can do in a winning streak is to increase your position size because sooner or later, you will have a losing trade. Traders who increase their position size will give back an unnecessary large amount of their trading profits when their streak ends.
Should you be aggressive?
Question 2: Are you playing catch-up? Do you want to get your money back?
The second reason why traders increase their position size is because they just had a few losing trades and they want to get their account back to where it was. Again, trading behavior, especially when it comes to risk and money management, which deviates from the norm is very dangerous.
There are two principles that all traders have to accept and live by to overcome this bias:
1) You cannot force winning trades.
2) The distribution between winning and losing trades is random. The outcome of your last trade will provide no information about what is likely to happen next.
Therefore, your risk management should always follow the same principles, even if it means that recovering from a few losses takes a bit longer. In previous articles we said that you do not have to risk the same amount on any trade, but suddenly risking an unusual high amount does not fall into this category.
Frequency of trades
Question 3: Are your trades justified? Do you really see more signals and valid setups?
Increasing trade frequency is another common mistake that leads to avoidable losses. Traders should carefully observe their trading behavior and ask themselves whether they are really seeing more valid trading opportunities or if they are entering a status of overtrading.
Having a trading plan and a trade checklist can prevent overtrading because you will consciously and actively have to break your trading rules. Even better, print out your trading plan and checklist and put them next to your screen where you can see them at all times.print out your trading plan and checklist and put them next to your screen where you can see them at all times.
Leave your ego at the door
Question 4: Is adding to your position really what you should be doing? Why are you widening your stop loss? What if price does not turn around?
Traders have to be confident in their abilities and about their strategy, but you cannot let your ego get in the way of a trade. Pride and taking losses personally are two traits that do not go well with trading.
Adding to a losing position or widening stop loss orders are two of the most common reasons why traders blow up their accounts with just a few trades. At the same time, they are clear indicators that you can’t accept to be proven wrong and that you personalize losses. If you fail to overcome these negative trading patterns, becoming a profitable trader is impossible.
The 4 Ps to establish a professional trading approach
We can’t stress the importance of having a solid trading plan and a trade checklist enough. If you plan your trades in advance, you are less likely to make impulsive trading decisions or violate your rules.
As a trader, nothing should come as a surprise. You plan your trades in advance, you define your risk and the worst-case scenario, you know when to get out, when to take profits and you process all available information. If you find yourself in a situation where you have to deal with the unexpected, something went wrong.
To overcome negative trading patterns, tracking and analyzing your performance is the only way you can improve as a trader. Most traders make the mistake that they will never look at a trade again after they close their position and, therefore, leave out an important learning effect.
Protection does not only include having a stop loss in place, but it goes much further. Once in a trade, traders often act like a deer staring into headlights, unable to make rational decisions. Where and when do you lock in profits? Do you move your stop loss order to protect your position? When will you take profits ahead of your target? What are the criteria that will make you close your trade early?
A structured approach and a pre-defined game plan will keep you out of trouble. Trading should be a repetitive profession; each day you follow the same routine, you look for the same setups and just repeat your process over and over again. If you recognize that your behavior and actions deviate from the usual routine, something is going wrong and you have to counteract.