Why Most People Fail to Make Money Trading

Trading mistakes are what differentiates profitable traders from losing traders. A mistake is defined as something which prevents the accurate implementation of the trading plan. Winning traders make few, if any, mistakes implementing their trading plan, and therefore benefit from the full profit potential of their trading systems. A losing trade is not a mistake if the trading plan has been followed correctly.

Trading mistakes can be split into the following 3 areas:

• Methodological
• Psychological
• Typographical

Methodological

Methodological mistakes are made when the pre-defined method, process, or system is not followed, and therefore trading is being done at random. Implicit in this category of mistakes is trading without a plan; since if you are not trading with a plan how can you know if you are trading the plan consistently. Other mistakes in this area include:

• Altering your plan while the markets are open.
• Not having a rule defined for every conceivable eventuality (i.e. trading with an incomplete plan)
• Trading a plan that has a negative expectancy (any profits are made by chance, and the longer you trade this plan the more likely it is that you will lose)

Methodological mistakes can be eliminated by having a complete and well-defined trading plan before trading commences.

Psychological

Psychological mistake are ones where you have a good and complete trading plan, but you fail to implement it accurately for personal reasons. These include fear, greed, excitement, boredom, tiredness etc. Examples include:

• Not taking a trade that matches your entry criteria
• Exiting a trade that does not match your exit criteria
• Adding to a trade that does not meet you addition rules
• Not exiting a losing trade when exit criteria are met
• Trading whilst sick or tired
  

If psychological mistakes cannot be controlled and minimized, the profit potential of your trading system will not be realized and the result will likely be losing, or erratic trading.

Typographical

Typographical errors are ones where data relating to your trading system, or order entry or management information is mis-keyed. This includes:

• Mis-typing symbol, size, order type, etc when entering an order.
• Putting the wrong price on a stop order.
• Any other data entry errors that cause you to either miss a trade, or incorrectly implement a trade.

These are the easiest types of mistakes to make, but are also the easiest to prevent with good automation procedures, or data entry checking and validation procedures.

Summary

Mistakes must be eliminated where possible, and minimized where not possible. The traders that consistently make money are the ones who are making few mistakes, and are taking the money from the traders who are. In order to eliminate mistakes you must be aware they are occurring so it is very important to keep a trade diary and record every trade, especially ones where a mistake is made. Usually this mistake can be attributed to an incomplete plan and the plan can then be enhanced to prevent a similar mistake being made in the future.

If repeated psychological mistakes are made, it may be time to admit that you are not suited to be a trader and need to find someone who can either trade your capital, or implement your trading system for you.


Paul King
PMKing Trading LLC
Source: http://www.pmkingtrading.com