Trading’s Most Critical Mistakes

BarroMetrics Views: Trading’s Most Critical Mistakes

I love to teach. My main payoff is the satisfaction I feel when I know I have had the same impact on traders’ results as Peter  Steidlmayer had on mine. At the same time, I take another step towards achieving one of my deepest desires: to leave a positive legacy.

Recently I met with the 2008 attendees of the Habits of Success seminars, and it brought home to me that those that succeed correct critical mistakes:

  1. They formulate rules that define the opportunity i.e. define when the probabilities are on their side. One caveat is important here. Neurological evidence shows that our brain is a pattern-seeking machine and we will react to patterns. It’s important therefore to allow some room in our plan for a variation to our plan. This is akin to our plan to wait for the lights to turn green before crossing the road. But if it’s a straight road with a clear view and there is clearly no traffic coming in either direction, I think it senseless to wait for a ‘green walk sign’ before crossing. The rules were designed with a certain context in mind and if the context does not fit, we change our game plan. What is important is we have benchmarks for the new plan in the same way we did for the old.
  2. They have trading rules but fail consistently to execute them.
  3. They add to losing positions.
  4. They over trade i.e. either take position sizes so large for their accounts that the risk of ruin is great or they trade too often.

All four have as their prime cause the unconscious motivators and poor habits. One way of re-framing the problem to provide a solution is to define a loss as a breach of the rules rather than as a financial loss. Viewed in this light, we are less likely for example, to add to losing positions. Of course when I say ‘add to losing positions’, I don’t mean the situations where we have planned progressive entries.

Instead, what I am alluding to are those occasions where we have planned a position size and exit strategy and then rather than take a loss, added to a losing position to ‘average our entry’. Here our motivation is to run from the feelings generated by the price action rather than a reasoned/emotional response to probabilities on offer.

In the last few posts (including the Habits of Success announcement), I have focused on the need to start with the foundations of trading success: risk management and psychology because although more important than a set of trading rules,  usually, they are at best given lip service and at worst ignored or disseminated with out-of-date material (for example: trade without emotion!).

My advice: undoubtedly, you need a set of rules but start with a simple one and focus on cementing the foundations.

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