Trading Tips

Are you really cut out for trading?


I don’t know if this is really a recent post or not as every post on her sight seems to have the same date on them at the moment, but at some point Jessica at Rouge Traderette shared some thoughts on how to figure out if trading maybe isn’t for you. She presents a trio of signals that maybe it isn’t. I’ll address each in turn.

1) You can’t sleep
I actually think this might have more to do with either excitement or excessive risk taking. We’ve all been in situations where we’re just too excited to sleep at night. I know in my own trading there have been times I’ve awaken in the middle of the night and checked my positions to see how they were doing from a positive perspective. Do you maybe want to reign that in a bit? Probably.

From a negative perspective, if you can’t sleep because you’re worried about the market going against you then you’re probably trading too big. You’ll sometimes hear the advice that you should set your position size to the point where you can sleep at night. If insomnia has you up can checking your positions in fear of taking a loss, then it’s probably time to cut your size.

That said, if you are really hesitant to even pull the trigger on a trade regardless of size for fear of losing money or simply being wrong then maybe trading isn’t for you. I once had a student in a class who wouldn’t even do a trade in a demo account out of fear. Not a good sign for a would-be trader.

2) You are overly concerned with your losses
Jessica actually presented this in terms of denial, which is definitely something to be worried about. If you can’t face up to your losing positions, that’s not a good thing! You’re going to have a lot of losers over a trading career. You need to learn to be able to handle them. Going down the denial route will almost invariably lead to disaster.

Think of it in these terms. Traders who don’t abide by their stops are the ones who tend to take the biggest trade losses because their positions just keep running against them. What do you think is going to happen if you are in so much denial about a losing position that you won’t even look at it?

3) You can’t separate trading from real life
As with anything else, you don’t want trading to become your whole life. That’s not a healthy situation. On the relatively mild side of things it can lead to early burnout. At the more extreme end of the spectrum is things like lost relationships and disastrous trading because you’re taking things personally.

I admit, trading can be very stimulating for any number of reasons. For that reason, though, caution is required. There’s nothing wrong with trading as a form of entertainment, so long as you understand that’s what it is and set your financial expectations and commitments according.

I would add one BIG thing to this list:

You think that you will change your life overnight.

Trading is work and like anything takes time. If you’re looking for a quick fix, walk away.

Trading Tips

Did you really make that market call?


A couple of different things came together to motivate this particular post. One of them is a post on the Pys-Fi blog from a few years ago I recently revisited. It’s on the subject of our memory, both in general terms and specifically with respect to our involvement in the financial markets. The driving thrust of that pieces is that we cannot and should not always trust our memories.

That’s right. Your memory is not nearly as solid as you might like to think. It’s subject to external manipulation and also your own internal issues like hindsight bias.

That article, in turn, reminded me of a resent EconTalk podcast episode on the subject of forecasting. In it, guest Philip Tetlock talked about reviewing the forecasts of a group of people who had been put through an experimental process. The subjects were asked to recall their prior forecasts and the degree of accuracy they exhibited. Tetlock found that the forecasters often were not nearly as accurate as they thought they’d been.

Can you see how this might be an issue in your trading?

If you can’t rely on your memory of your past performance making market calls, how much faith can your have in the methodology you are using? Not much, I’d say.

So might think that a way to avoid this sort of problem is to trade entirely mechanically. Maybe not, though.

In the final analysis, your faith in any system or approach is going to be reliant on your recollection of it’s performance. Selective memory could see you exaggerate the system when things are going well – perhaps leading to over-trading. Similarly, it could lead to not taking trades during draw down periods. Neither is an optimal outcome.

In the post Being a reflective trader from the other day I talked about the idea of reviewing your trading periodically. This is something which might help. Regularly looking back over prior trades will tend to help keep a realistic record of your performance – or your system’s performance – in your memory banks for future recall.

Something to consider if you’ve hesitated in keeping a trading journal.

Trading Tips

Learning to let your winners run

I came across a forum thread recently in which the poster made the following observation:

When I’m in the trade I always watch it and see it pull back and then sometimes i take myself out. Once I take myself I look at the pair the next day or two days and see it made the complete move and if i just didn’t touch it would of completed.

I think a solution to this is once i get in the trade only watch the daily chart so i can’t see these moves..

This is a classic case of what in academic terms is known as the Disposition Effect. That’s our tendency to want to take profits quickly and to let losers run in hopes they turn around. It’s based on the idea of loss aversion. Basically, we feel the pain of losing more intensely than we feel the joy of winning. Think about your own life – trading and otherwise. Does that sound about right?

The poster’s idea to not watch the chart and thus avoid the temptation to exit a winning trade early is one way to go. Unfortunately, it doesn’t really solve the problem. It merely attempts to avoid having to deal with it.

A better solution would be to learn to disconnect emotionally from the results of any given trade. That’s not easy, to be sure, but if you can do so you’ll not only help to avoid things like cutting winners early and/or letting losers run, but you’ll also turn your focus on your bigger picture performance, which is where it should be.

Trading Tips

Optimism in trading is good, to a point

Jess at Rogue Traderette recently posted on the subject of optimism as a key requirement of traders for long-term success. I tried leaving a comment, but it was either lost in the system or deleted, so I figured I would post my thoughts here.

First, I generally agree with Jess that a certain sense of optimism is required in trading. Perhaps resilience is a better choice of words, but the idea is the same. The market is going to throw a lot of negativity at you and you need to not let it do any lasting damage.

That said, I have two counter-points.

First, we humans have a tendency to attribute things that go positively for us to the validity of our own decision making, or skill, ability, etc. even though it might just be random dumb luck. Similarly, we like to place blame for when things don’t go our way on external factors (brokers, market manipulation, regulators, etc.). We have plenty of anecdotal evidence for this in trading forums and elsewhere, and these are documented biases in the psychology research literature.

Second, being optimistic can mean not doing a very good job in terms of risk management. By that I mean those inclined to think happy thoughts can very easily under-weight the negatives in their market analysis, trading plan development, etc. That leads to taking positions which are too large, putting on trades which should be avoided, and other things which can cause considerable harm. When deal with risk, it makes a lot of sense to think first about the prospect for loss.

New traders are very subject to these issues. After a few slaps of reality in the form of losses, though, most folks who stick around long enough get things sorted out.

Reader Questions Answered

How to tell if you’re over-trading

A trading forum poster recently asked the question “How do I know if I’m over-trading”. Over-trading is a trap many of us fall into, especially during our early developmental stages in the markets. At that point we haven’t gotten a hold on the emotional side of things quite yet (though sometimes we don’t even realize it), so feelings like greed, excitement, boredom, etc. drive us to over-trade at times.

I look at over-trading in two ways. One is trading too big. The other is trading too often.

Over-trading by trading too big
Risk management is obviously a major factor in one’s chances for trading success. Each of us needs to find the risk level which suits us and our style of trading. That may be 1%. That may be 10%. Some folks like to say you should trade just below the point where you’d have trouble sleeping at night.

A somewhat more empirical way of knowing whether you’re over-trading in terms of size is to look at the period-to-period volatility of your trading equity. And don’t just think in terms of losses. Large gains are just as indicative of trading too big as large drawdowns. If you’re account jumps 10% in a single day (assuming it isn’t because of an extraordinary market move), that’s a pretty good indication your trade(s) is/are over-sized. Sure, a 10% one-day gain sounds great, but the problem is it means you could probably just as easily take a loss that size.

Over-trading by trading too often
The issue of trading too frequently is one that can get a bit more complicated to diagnose. It’s not just a question of the number of trades you do. It’s a question of the quality of those trades. One trader could trade 100 times a week and not be over-trading while another trader could trade 5 times a week and be doing too much.

Lots of different things motivate over-trading in this fashion. I think they can mainly be resolved by asking the question “Am I looking for a trade or am I waiting for a trade?”

If you are looking for trades then you are subject to all the emotions that get you to enter positions when you probably shouldn’t. These include really dangerous mindsets such as thrill seeking and revenge trading. This puts you at risk of taking bad trades just for the sake of doing something.

What are your experiences with over-trading and how did you get yourself back on track?

Trading Tips

Overcoming hesitancy in trading

I saw this on a forum recently:

A lot of times I will hesitate to get into a trade because I’m too risk averse.

Fear of taking a loss is often the cause for hesitation pulling the trigger on a trade and the easiest to deal with. For those in this situation, the best advice I can offer is to cut your trading size down to the point where any loss you may suffer is so small as to be inconsequential. If you’re not going to feel any pain from losing then you should be able to trade without that hesitation.

Now, if you still struggle to pull the trigger then you have a confidence issue. I’ve addressed some aspects of this in the post Afraid to Trade? Build Your Trading Confidence. For some people, though, the issues are more deep-seated. For example, the forum poster I mentioned talked about his issues talking with women. That means his problem isn’t trading-specific, so he likely needs a broader solution to his confidence struggles.

Have you struggled to pull the trigger? If so, how did you overcome that?

Trading Tips

Ten of the leading trader mistakes

Jim Wyckoff has a good article out which looks at the causes of trader failure.

  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.