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.
4. Failure to use protective stops.
5. Lack of “patience” and “discipline.”
6. Trading against the trend–or trying to pick tops and bottoms in markets.
7. Letting losing positions ride too long.
8. “Over-trading.”
9. Failure to accept complete responsibility for your own actions.
10. Not getting a bigger-picture perspective on a market.

I think this is a very good list. I dedicated a considerable amount of my book (and by extension my course) to developing a good trading plan, and many aspects of Jim’s list tie in with the things I talked about there. I have written previously on the subject of “protective stops“, so I won’t go into that again here. You can also see my recent post about traders letting losers run too long.

For me, #9 may be the biggest one of them all – at least for some people. Too many traders want to blame poor performance on someone else.

I will contend with Jim on the trading with/against the trend in #6 as there are systems that do quite well operating in a counter-trend (often called mean reversion) fashion. That, though, is different from trying to pick tops and bottoms, which usually ends in disaster.

I’ve pull the following set of numbers on trades which include USD pairs (no crosses), of which my data contains over 2 million records.

Winners: 1,280,459
Average Profit: $60.03
Average Pip Profit: 28.20

Losers: 752,614
Average Loss: $105.14
Average Pip Profit: 63.88

Notice there are many more winners than losers. They represent 63% of all trades. These are retail traders, so it just goes to show that you don’t want to get too crazy about looking to trade against the collective.

Notice also that the average loss is about 75% higher than the average profit. That completely offsets the 63% win rate and results in a negative overall expectancy for the group.

It must be noted, however, that that average loss appears to be due to holding on to losers too long rather than risking too much money. Notice how the average loss in pip terms is more than double the average gain. Traders actually had lower pip values on their losing trades than on the winning ones (on average). They just held on too long.

Here is the problem is for most traders. They are quick to take profits and slow to take losses. This is referred to as the Disposition Effect in Behavioral Finance research.

Much more analysis of the data needs to be done, but these results are very interesting nevertheless.

1) Make sure you take some time off.

2) Do things outside of work so that you do not value yourself from your trading. Trading is the game we play. It is not who we are.

3) Be grateful for the privilege of trading. It really is so cool that we get to do this for a living. Be thankful for this opportunity, no matter how short or long.

4) Stop judging your trading by your PnL. For example that trader on our desk had a better month than the prior though he did not make more money. He worked on his sizing. There was less opportunity this month than the prior so comparable results are an improvement. He gained another month of experience.

5) It is ok to fail. How is Oprah doing with OWN? Remember that Michael Jordon commercial about all his failures before triumph. Oh man if you only knew how many stupid mistakes I make every week as a trader. Failure is a blessing to learn.

Now it must be noted that Mike very much looks at things from the perspective of an active day trader. That’s pretty obvious in #3. That doesn’t mean the same ideas aren’t useful for someone who only trades part-time. They definitely are. We all need to take a break from the markets from time to time. We all need to realize we are not defined by our trading. We all need to realize that mistakes and losing trades are part of the process and that we shouldn’t be looking at what others are doing to determine our success (which is something that get’s talked about in Trading FAQs).

Shhhhh!!! Don’t tell anyone.

The WTE post spins off some from a Forex4Noobs post on the subject of thinking about getting rich slowly rather than trying to do it tomorrow. You may recall me writing about that in Taking the Trading Long-Term View. The “How long will it take to …” question was one that I and the contributors to my Trading FAQs book tackled.

The bottom line, as always and with just about anything meaningful you would take on, is that it comes down to hard work, education, and the patience to see things develop over time.

“The majority of trading success comes from the mental side of trading not the strategy…”

The article then goes on to say that psychology is 85% of the equation of trading success, with money management coming in at 10% and strategy at only 5%. I reject this completely.

To explain my own position (as I also did in a recent online panel discussion), which is one I share with Dr. Brett Steenbarger, who literally wrote the book on trading psychology (The Psychology of Trading), let me ask these questions.

If you don’t have a positive expectancy system, does your mental state matter?

If you don’t have the risk management side of things right, will it make any difference how strong your discipline is?

The answer to both questions is “No”.

Trading completely without emotion seems to be the ideal many folks are aiming for in their trading. You could turn yourself into a robot (or program a robot to trade your system), but that’s not going to turn a losing system into a winning one or overcome poor risk management.

It takes all three elements to be a successful trader. If you’re missing any of the three legs of that tripod, it won’t stand up. Psychology does become the thing you spend the most time on once you have a good system and risk management strategy, but that doesn’t make it more important.

Here’s the thing, though. Notice the two other circled times when the two lines deviated. What happened to bring them back together? Ummm…EUR/USD sold off – and fairly sharply. Why does the blog author expect something different this time? Given the Commitment of Traders figures that have shown the short bias among euro traders, it certainly looks like the major players are leaning in that direction.

This strikes me as someone looking for proof of their thesis rather than developing a thesis from the evidence, which is a major pitfall we all face in the markets.

In your opinion, how should I properly prioritize my time between reading and learning versus actual practicing (time spent on simulator) to gain the skills I need as quickly as possible?

There are a couple of key points I think are worth speaking to here, both in terms of stuff talked about in the post and from my own point of view.

First, it’s important to shift into “doing” as quickly as is reasonably possible. Early on you have to spend a lot of time learning by reading, etc. to get the foundational information required. To learn how to trade, though, you actually have to do trading activities. When I say “trading activities” I mean all of the stuff that goes into trading. That includes market analysis, trading system research, and of course taking and managing positions. As in the blog post, I think time spent in the markets should be a large multiple of time spent learning about them.

The second thing I would say is that it’s not enough to do simulation or demo trading. As I’ve written before, to really get the full effect you need to trade real money, not paper money. Obviously, I’m not talking about putting a lot of money in the market or taking big risks. My point is that demo/simulated trading is very different between the ears than trading with money actually at risk.

The last observation is the more you can practice, the faster you will see gains in your trading skills. This is obvious, but it speaks to a certain point. Someone who only has an hour a day to devote to trader development is at a disadvantage to someone who has 8 hours. Using a simulator, though, creates an opportunity to increase “trade” frequency. It also allows you to work through all kinds of different market conditions, not just those present during your learning period.

To that end, I’d like to hear from readers about what good simulators they have come across. If there’s one you think is good, leave a comment below.

I have long held the view that volatility is a major factor in trader performance and one day I hope to do some real research to see if that’s really the case. Certainly systems and methods that are based on trading narrow ranges will suffer when that isn’t the case and range trading systems will fall victim to trending markets.

There’s a problem with the data presented in the DailyFX article, though. It only shows the win % of trades done during those periods (though we don’t know if they are opened and closed, just opened, or just closed in the hours presented). As I’ve harped on here and in other places, win % alone doesn’t tell you anything. You need to know the average gains and losses as well.

To back this up, I once saw data on the performance of a large collection of forex traders. Over a given time frame (don’t remember how long that was) they traders were profitable on something like 60% of their trades. Even though that was the case, the group as a whole still lost money.

Now, the DailyFX article does show performance figures for a trading system when times of day are factored in which suggests better profitability. That would tend to support the overall hypothesis, though obviously it’s just one example. I’m not arguing the general point. It definitely does make sense to look at how the markets trade during certain times of day and not just go along with the matra of the London/NY overlap presenting the best trading opportunities. I want to make sure we’re looking at the data properly and applying it effectively to our own situations in a useful fashion.

This was when I first started trading forex. I’d been a forex analyst for a while, but to that point had stuck to the stock market for my trading. Spot forex trading hadn’t really developed yet, so I was doing it through the futures market.

I’d opened a $5000 account with a broker that offered online trading, though at that point it was just using the internet to submit orders rather than calling your broker, so the technology was nowhere near what we have now with real-time prices and instant notifications of fills. Even with market orders you had to wait to get confirmation. This was to play a big part in the drama which was to unfold.

My first trade in my new account was in the yen (for those forex traders unfamiliar with forex futures, think the inverse of USD/JPY). I can’t remember whether I was going long or short. I used the online platform to place a market order. After a spell in which I didn’t get a confirmation, for some reason I decided to cancel the order. I can guess what you’re thinking, but don’t jump ahead!

A short while later I reconsidered and put the order back in.

Naturally, as seems to always be the case when you’re nervous and indecisive, as I clearly was, the market went against me. I don’t remember where my stop point was, but obviously it got hit. Keep in mind this was back when you had to place entirely separate orders for stops and limits when you opened up a new position. You couldn’t do it all in one go the way you can these days.

So here I am thinking I’ve taken a loss, but not a horrible one. Granted, I was trading full sized yen contracts on a $5000 account, so even a small loss was going to be more than just a couple % (I think we’re talking $12.50 a tick). It was totally risk capital, though, so I wasn’t really sweating it.

Then I got the bad news. I still had a position on because in my addled state it hadn’t occured to me that you can’t cancel a market order. Duh!

I think the news came via a margin call, but I might be wrong. Maybe it was just a statement and a conversation with a broker rep. Either way, most of my account equity was now gone and I felt like someone had punched me in the gut. I remember feeling sick to my stomach much of that day. It was so bad that co-workers noticed and asked if I was OK.

I’ve done other stupid things in my trading, but this the only one that was so bad it made me sick. Between being so rattled and having flushed all that trading capital down the drain, it was a while before I got back into the market. I think it was about a year, at which point I opened my first spot forex account, though this was still in the phone call days. Things went much better the second time around trading forex.

So what about you? What’s been your most harrowing trading experience?

I have been profitable every month since and including August of this year. Month to date December I am profitable as well. Before that I saw trickles of black but was always losing on balance and never had two consecutive profitable months until recently. I would greatly appreciate if you could shed some perspective on how I am doing based on my results. I am taking the money up every month so the only way to assess my results is based on percentage gains for a given month based on the account size traded that month. 2011 is my 4th year as a developing trader. For August through December (MTD) I sat down to trade 76 days and took 118 trades averaging 1.55 trades per day. My win ratio is 55.78% excluding scratches. My winners are 43% larger than my losers on average. I am in my winners 2.68:1 longer than my losers. My average risk per trade is 1.02% of the account size for a given month. The max risk I took on a trade was 1.65% of the account size. Nothing crazy risk wise. I always have a hard stop in the machine -always…and I never ever cancel it. For the 4 months August through November (2011), I have an average gain of 2.32% of the account total for that month. (6.7% the best/August -3.3% worst/September)

There are a few things that can be extracted from this:

1. This trader has been going at it for several years and only now is finding his feet as a profitable trader. This is very common because the majority of folks who start trading really have no idea where they are going or what they need to do to get there. Figuring that out (usually through trial and error) often takes literally years.
2. The trader had spells of profits, but was generally losing until the last few months. This is the standard pattern because consistency is lacking and developing traders often don’t know why they are struggling. And even when they figure it out, they still have to consistently implement the required change to get things sorted out.
3. The trader understands the value of keeping track of his performance statistics, which too few traders do. The step he’s lacking here is the objective benchmark against which to measure his performance – at least so far as he’s communicated.

What this person is looking for from evaluators is whether he’s making enough from the markets – and also whether his performance has reached a level of predictability to suggest that it’s OK to add money to his account (that’s a separate part of the email). The numbers certainly look good. The problem is, though. we don’t have any way to tell him whether his results are good in the context of his trading method/system and repeatable or not.

Just as a start, we don’t know whether he’s trading a consistent system or multiple different ones. We also don’t know whether he’s being consistent in the application of his system or methodology. An additional question is why he’s only traded 70 days during the period in question. What’s the cause for not trading on the other days and does that have an implications for his performance?

I can also think of these other questions:

• Do you ever have multiple positions on at a time?
• If you’re risking about 1% per trade, why are only only making about 2.3%/mo given the number of trades done per month?
• How much time is being put into the trading?
• Given the numbers provided, the trade expectancy is about 0.355%. How does that compare to prior performance of the system/method employed, or to how the system should have been employed over the time period in question?
• Can the system/method be used in a more frequent fashion to produce higher returns?

There’s a lot that has to go into actually judge trading performance. Just looking at the return figures isn’t going to be enough in a case like this. The best approach for any trader in this kind of condition is to try to figure out how they could/should have traded their system or methodology over the period in question and compare that to how they actually did. If the two are a close match, then you’re at least doing that part of it right. It then becomes a question of whether the system’s performance can be sustained and scaled up.