Section I: Introduction
Most brokers agree that 90% of all traders lose money, 5% of them break even, and only 5% make money. These statistics are not that encouraging for us traders, but it is the reality.
I have good news for you though, the mistakes that cause this rate of failure are common and we have already identified most of them.
Some of these common mistakes are because they are lured into trading for the wrong reasons, and some others because they fail to work through some guidelines.
Being aware of these common mistakes and by learning to take the proper steps to deal with them, the odds will change in your favor.
Topics covered in this lesson:
Section II: The Search for the Holy Grail - Some traders spend most of their trading careers trying to find the perfect system and fail to realize where the key to success is.
Section III: Looking for Easy Money - Trading successfully is no easy task, it is achievable but requires a lot of work and time.
Section IV: Looking for Excitement - Being called a Forex trader is exciting, but having negative returns month after month is not.
Section V: Not Having a Business Plan - A business plan is like a roadmap that will not only tell you when things are right but also when things go wrong.
Section VI: Not Having a System - Our job as traders is to generate consistent profits, and the only way to get there is through a trading system that fits your needs as a trader.
Section VII: Not Using Money Management - MM helps us avoid the risk of ruin, but at the same time it allows us to geometrically increase our profits.
Section VIII: Lack of Discipline - Having a trading plan and a business plan is not enough, we need to strictly follow all our rules.
Section IX: Not Being Aware of Human Nature - Some behavior that might seem logical on our everyday life, could be disastrous to our trading career.
Section X: Not Being Psychology Tuned - Being aware of the most
common psychological barriers will put us one step ahead.
Section II: The Search for the Holy Grail
Many traders spend years and years trying to find the holy grail of trading. That magic indicator or set of indicators that will make them rich easily, known only by a handful of traders.
The Truth is that there is NO Holy Grail
There is no indicator or system that will make you rich easily. The best traders have no holy grail, it isn’t their system what makes them superior traders, they have other characteristics such as self-discipline, patience, they work hard, they take calculated risks, they do trade consistently based on a trading system (it does not need to be THE PERFECT SYSTEM, just a system), they follow it follow it rigorously, they know they will never stop learning so they have their mind open to every possibility, and most importantly, they have accepted the risk, they know deep in their hearts they are risk-takers.
How come there is no Holy Grail?
Because the market changes. The market is never the same, each moment is unique, patterns are just similar. If all patterns are unique then the outcome of each one of them is statistically independent from one to the other. If every pattern is different, then all set of indicators or systems will fail from time to time.
The two most common mistakes traders are likely to make in this subject are:
Most traders try many systems or set of indicators and them drop them out because they failed a few times. They never give them the time required to accurately test the system.
Another common activity is when traders start out with an easy system, when it fails, they add an indicator that could had kept them out of that particular trade. Then it fails again and they add another indicator. They end up with a very complicated system that is hardly tradable. Then they drop out the system and the process starts all over again.
The important thing here is the valuable amount of time lost in these practices. Some of them spend a lifetime trying to find the nonexistent: the Holy Grail of Trading.
FACT - There is no holy grail. It isn’t wise to try to find the perfect system or indicator that will keep you out of losing, because losing is just part of this business, like spending in raw material in any other kind of business. Instead, you can focus in one indicator/system that will keep you in the market when good moves happen. With good money management and a good risk reward ratio, the odds will be in your favor!
Section III: Looking For Easy Money
Unfortunately, most people are attracted to the Forex market for this reason.
All because of the publicity of:
- Some brokers showing or rather trying to show how easy is to trade and make money almost instantly in the Forex market
- Signals providers offering the best signals that will make you rich instantly and reach the financial freedom every trader is looking for by showing you the secrets of the big dogs.
Is it easy to trade?
Yes, it is true, everyone can do it, putting on a trade is only one click away.
Is it easy to make money?
Yes, I will have to agree with this one again, it is easy to make money. No knowledge of even what a constitutes a currency is required to make a winning trade. What they don't tell you though, is that it is even easier to lose a trade (because of the spread).
What is important here is that you cannot earn a living trading that way. In order to make a living trading the Forex market, you need to be consistent, and believe me, this is no easy task. To be a consistent profitable trader means that over several periods of time a trader makes money. Just 5% of all traders achieve this goal. Therefore, it is possible, but in no way easy.
Is it possible that a signal provider could make a trader rich? I don't think so. There are no certainties in this business; in fact, no one (signal providers) will ever care if you lose money. The only person responsible for losing money following someone else’s advice, will be you. Because you are the one who is actually executing the trades.
There are no short cuts; no one will ever make you rich but yourself. How do we achieve this? Working hard, this is the only way you can succeed as a trader.
Besides, what would you get by following someone else's advice? Nothing, following blindly someone else's advice would not give you the knowledge, the experience and nothing else good at all. Because you do not know the reasons behind any trade, you don't even know if the signals come from a system. You might make some money if the signals are good. But let me ask you another question… Do you intend to rely on one signal provider for the rest of your life? I don't think so.
So at the end, you will lose precious knowledge and experience that you could have gained by trading on your own, and most importantly, you will have lost time.
And what about the big dogs’ secrets?
Again, there are no secrets, the only truthful secret is that there are no secrets, but please keep this between you and us J
FACT - There is no easy way to become a consistent profitable trader. There are no shortcuts, and the only way to get there is through hard work, self-discipline, patience, understanding the market, experience, taking only calculated risks, and more characteristics that we will learn throughout the course.
Section IV: Looking for Excitement
Some other traders are attracted to the Forex market or any other financial market because of the excitement that is to be and be named a trader. And to tell you the truth, it is very exciting. But if this is the main reason you were attracted to the Forex market, or more precisely, this is the reason you are still trading or interested in trading the Forex market, sooner or later you will discover the most expensive adventure you have ever known.
At first, it is all excitement, but as the time goes by, and traders get more involved in the trading process, they realize it is not as easy they thought it would be. All the excitement calms down, and it becomes an obsession. At this phase, only the 5% of all traders, the ones that are consistent profitable, still think it is exciting.
Believe me, there is nothing less exciting than losing money month after month. This happens to around 90% of all traders.
I am aware most of us think trading is exciting, and there is nothing wrong with that, as long as it is not the main reason you are still trading or intend to trade.
There are many other exciting adventures that are way cheaper than trading. Analyze it, because trading, if treated this way, could be a very expensive adventure.
FACT - Yes, trading is exciting, but this should not be the main reason you are trading or intend to trade. Do some thinking on it, otherwise, you will find out the hard way as many have done.
Section V: Not Having a Business Plan
If anyone saw an incredible business opportunity with almost no competitors and a great demand for a certain product, what is he or she likely to do? Probably do a lot planning before entering into that market, as most businesspersons do, or rather, as every successful business did.
During this process, the individual will probably discover things that could have gotten him or her in trouble if she or he had ignored them. And this is exactly what a plan does, prepares you for the troubles you might encounter during your adventure.
I wonder then what happens when it comes to trading. Why is it that traders commit themselves to something barely known? You probably guessed it; they want the money right now! Most traders think “Why should I plan something when I could be getting rich by the minute? Let’s do the planning some time later.” They come to the market with such unrealistic expectations, and think that success is achievable in a matter of weeks.
So, what exactly does a business plan do for me? It prepares you, for any contingency that should arise, and the most probable thing is that you will encounter a few surprises.
Take for instance, what would happen if your system suffers the biggest drawdown ever (drawdown is a chain of consecutive losing trades)? Would you quit trading? Or even change your system? Review your system and determine if the market conditions have changed so that you will have to adapt to the market? It should answer this and other questions that are essential parts of handling the business.
FACT - Trading the Forex market, as any other market, should be treated as a business, not a hobby. It will have pitfalls, and you should be prepared for them.
The most important thing about a business plan is that the decisions, observations and limits are set on it, and they were made with your feet on the ground. You will know that by relying on it, you will make the right decision. If you encounter difficult times in trading, your common sense will try to lie to you, will try to make you believe things are alright, and without a business plan it could be the end of your trading career.
Section VI: Not Having a System
Some traders make trading decisions without any methodology or system. Imagine yourself on a trip in which you intend to drive to the west coast. If you don't study the route to take, where to rest, or you don't even know what cities or villages you are going to pass by, you will probably end up in the east coast, or on the north border, but most importantly you won’t know in the middle of your adventure if you are on the right path. On the other hand, if you know the route to take, villages and cities you are going to pass by, you will know you did something wrong should you drive into an unknown village. At this point, you will review your route, turn around and get on the right route.
The same goes for trading, if you do not use a system or methodology you won’t know what you are doing wrong until it is too late and your trading account is in great danger.
You cannot get into a trade because you think or believe the price is going to go up or down. You need a plan of action, a trading plan that will get you in and will guide you through each trade.
Imagine a trader at the end of the month; her trading account is up, the best month ever. Then she decides to go back and review all the trades made during that month. When looking at the trades she realizes there is no possible way to replicate those results because all of them were entered without any system what so ever, in a word, randomly. In other words, she got lucky. The same goes when everything goes wrong, she will not be able to discover what she is doing wrong because she is not following any system.
The most important thing about having a system is that all the rules that govern it were made when there was no money at risk. This way you are sure that every decision taken based on the system is in your best interests. These decisions are not clouded by psychological factors (fear, greed, hope, etc.) that are present when real money is at risk.
FACT - You need a system or methodology.
This will help you realize whether what you are doing is right or wrong. It will also guide you through each trade. We all make mistakes occasionally, but recognizing them gives you a chance to study, learn from and work past them. Remember, the only way to get consistent results is by strictly following your trading system.
Section VII: Not Using Money Management
Money Management (MM) is one of the essential parts of trading. The main purpose of MM is to avoid the risk of ruin. The lack of using MM is one of the reasons most traders lose their trading accounts.
MM basically answers the next question: how much to risk on each individual trade? It should not be confused with risk and trade management (pyramiding, scaling out, trailing stops, where to place stops, etc.) MM tells you how big or what size the next trade should be.
Most traders just focus on the profit side of each trade and totally forget about the risk side. In other words, they think the trade is a winner before placing it, and therefore they do not pay any attention to the consequences a losing trade could produce on your trading account. But remember, every trade is statistically independent from each other. Although the outcome of a series of trades is predictable, there is no possible way to forecast the outcome of each individual trade.
The best systems available are only right around 60 or 70% of the time. For every 10 trades, there is a possibility to have 3 or 4 losing trades. If we don't pay attention to these 3 or 4 trades, we could end up losing month after month, or worse yet, blowing up (losing) our entire account.
We will never know which trade will be a winner and which one a loser, never. So MM should be applied in every single trade, regardless of what you think the outcome of the trade will be.
Even with a system that is right 90% of the time, you could end up broke if you do not apply a sound money management technique.
MM also helps us in the winning side of every trade, when applying MM techniques we could benefit from the geometric growth of our trading account. As your account grows, you will trade larger amounts according to the MM technique applied.
FACT - If you do not have a system that is right 100% of the time you should us Money Management (meaning you should use it because such a system does not exist), regardless of how big or small your trading account is. We will never know the outcome of the next trade, and this one trade could be the last one if you do not apply MM. using MM is not an option, it is a must if you want to achieve your trading goals. You need to do whatever you need to do to be able to trade the next day, week, or year.
If you want to be in this business for the long haul, apply proper trading sizing techniques.
Section VIII: Lack of Discipline
Discipline is a very broad word when it comes to trading. But it all comes down to one sentence, if you have the discipline required to be a good trader, your chances of success in this business will get higher, if you don't, you need to work on it so you could reach your trading goals.
It requires discipline to develop your trading system. Most of us are eager to enter a trade when it all begins. But if you don't develop the guidelines to follow on each trade, I am afraid the trading adventure will end sooner than you think. It requires time, effort and hard work to develop the system.
It requires discipline to follow your trading system. As stated before, there are no better decisions than those made by following your system. Take for instance the following scenarios:
1. You followed your system and made a winning trade.
OUTCOME: You will gain confidence in yourself and your system
2. You followed the system and lost the trade.
OUTCOME: Losses are unavoidable, you followed you system and it will give you confidence in yourself, because you know losses are part of this business.
3. You took a trade with no signal from your system and lost.
OUTCOME: You made a mistake and it turned out as a negative experience. You will now think it twice before entering the market with no signal.
4. You didn’t follow your system and didn’t take a signaled trade that turned out a winning transaction.
OUTCOME: Confidence in yourself will drop substantially.
As you can see here, mistakes are to be valued in terms of the decision made, not in terms of the money made or lost. We will develop more on this later on.
Discipline is also required when it comes to your working environment. To establish your working hours, to organize yourself, etc.
FACT - Discipline is a must in the Forex business. We will elaborate further on this subject in the following lessons.
Section IX: Not Being Aware of Humane Nature
So far, we have learned that trading should be undertaken similarly to any other business. There are losses as in any other business (like inventories not sold), but at the same time, it is also important to understand that trading itself is like no other endeavor. Some attitudes that could have given great results in any other task in life could have disastrous effects when it comes to trading. Some of them are listed below.
Fight! Till the End
Since we were kids, we are all taught to fight as hard as we could and do everything in our hands to achieve the desired results or get what we want.
When it comes to trading, the results could be far different. This is commonly named in the trading environment as “marrying one position”. Once you enter a position, you are convinced that it is a winner. Just as you got in, the trade goes against you and you might think “it has got to go somewhere first”. As it keeps going against you, you are still convinced that the trade is going to be a winner. Then you will probably think “operators or money makers are trying to scare us”. As your trade keeps going against you will keep telling yourself “hold it, hold it”. Then you realize the trade has gone too far. This makes it hard to take the loss, and you will probably say “I will wait to get break even, it probably wasn’t a good trade after all”. And the next thing you know is boom! Margin call....
The best thing to do in order to avoid this happening to us is to follow our trading system. Remember, the first time you violate your rules, could also be the last time you trade.
Trial and Error
This is a common practice in many tasks of life. And often it is the only way to get the desired results. Like in the scientific arena in some of the most important findings, scientists actually weren’t looking for what they found. It was the result of trial and error.
In the trading environment, doing this in a real account, will lead you to wipe out your trading funds. You cannot start trading your real account trying different indicators, patterns or systems to see if it gives you the results you are looking for, or if the system fits you.
You need to find what systems/indicators suit you before and not after you start trading your real account.
100%
Since kids, we were taught that we should try as hard as we could to achieve an A or an A+ (100 or 90%) on our grades. Getting those results was proof that we understood any given subject. And of course some of us got a little present as an incentive to keep trying hard.
In the trading environment, this could give us the wrong idea that having a system that is right 70% of the time is an average system, when in fact is an excellent system.
This kind of thinking could lead us to an eternal search for more accurate systems (the aforementioned Holy Grail).
FACT - These kinds of attitudes might make perfect sense in any other endeavor but they complicate our trading careers. For this reason, we need to open our minds to every possibility, even if it doesn't make sense in other areas.
Section X: Not Being Psychologically Tuned
This is one of the most underestimated subjects when it comes to trading. For this reason we have developed a complete lesson on this subject.
For now, it will be important for you to understand some terms and important concepts about trading psychology.
Have you thought about what a market is?
A market is made when there is at least one buyer and one seller of any good or service. What is important for you to understand though is how things are valued.
Take for instance, you need a car right away because you just got a new job and it is quite far away from where you live. A friend of yours also wants a new car, just to change his or her old car. You both run to the nearest car agency. Both of you are keen about the same car. When you both see the price, you will probably think “hey, what a good deal” and your friend will probably go “wow, this car is expensive”. This kind of thinking is obvious since you have a real need; you actually need a car to drive to your new job. Your friend, on the other hand, does not have a real need, he or she just want to change the old car. When people have real needs, they tend to overvalue things, while people with no real needs tend to undervalue things.
The same goes for the markets; the price of each instrument is based on perceptions of each participant in the market. Should the perceptions change, the price will change. It is impossible to understand the perceptions of every single participant in the market, thus almost impossible to forecast the price movement.
We will develop more on this subject later in the course.
FACT - Understanding all the psychological barriers that affect every trading decision will put us one step ahead of the game.
Summary Report
Ok, now that you have read the lesson material please make sure you completely understand and/or do the following:
Believe it or not, this section is more important for advanced students than for novice students. Advanced students have to identify their mistakes and change their behavior in order to achieve consistency. On the other hand, novice students only need to be aware of them and take actions to avoid them.
Changing behavior is not a simple task, be it in trading or other aspects of life.
Identify three or four of these common mistakes that you are most likely to make (or already fell prey to), write them down and for each one of them do a check list of what you are going to do to avoid falling prey to the chosen mistake. Have this piece of paper viewable by your desk at all times.
Take this exercise seriously, writing things down always helps us re-direct our thoughts and actions towards our objectives (as well as making them present at all times in our minds).
Good Luck!
