What’s a trading mistake?

A famous trader said that everything is a mistake until you follow your rules. Sounds simple, but it isn’t easy.

A losing trade is not automatically a mistake. Only if you broke your rules and the trade is a loser, it is a mistake. But winning trades can be a mistake, too. In that situation you only had luck.

In short: Trading mistakes are based on not following your trading rules. Besides that there are mistakes in order execution or technical mistakes. For example you can make a mistake while entering an order. But in that situation your process or routine is not good enough, because normally you should double check your orders.

Why reducing trading mistakes?

Mistake mostly cost money! It’s unimportant if it’s a losing trade or an execution error. If you reduce your mistakes, you will save money and improve your trading statistics.

In addition you will strength your mindset and improve your psychological situation. You gain self-esteem and you can rely on yourself.

10 tips to reduce trading mistakes

Here are a few tips how to reduce trading mistakes. They will help you to improve as a trader financially and psychologically.

1. Make mistakes transparent: Collect every trade in your trading journal and diary. Analyse them afterwards and find improvements.
2. Create a ruleset matching your personality: A lot of mistakes occur because the trading rules are not compatible with the trader. You have to change this! The rules must use your strengths and not your weaknesses.
3. Build and improve processes: Everything you do as a trader should be based on processes. Only if you have a defined process, you can repeat it again and again. Over time you must improve that processes with learnings and new information.
4. Use automation: You can automate a lot in trading, f.e. scanning for stocks, alarms or entering orders. This helps you to reduce mistakes.
5. Work on your mindset: A lot of mistakes are based on wrong imaginations or values. In example: If you think that a trader has to be in action all the time, you will force trades. Instead you could have a different picture of a trader as a focused and calm person.
6. Checklists: A checklist can help you to stick to your rules. It’s simple and very effective.
7. Use statistics to find mistakes: If you collected hundreds of trades in your journal, you can use this data to find mistakes. Often mistakes have something in common. Analyse your journal and find the commonalities of your mistakes regularly.
8. Score trades afterwards: If a trade is closed you should not only put it in your trading journal. Review the trade and score it: Was it a good trade? Was there a mistake? Were all rules fulfilled? Would you make this trade exactly again?
9. Review your trading journal with a second person: This helped me a lot! I sent my trading journal to a previous mentor and he reviewed my trades for me. He found a lot of things to improve and commonalities of bad trades.
10. Quality instead of quantity: Work on your quality everyday! If you improve your quality, it’s only a question of scaling to make a lot of money. Reduce bad trades, select the right time to trade and select only the best trading candidates. Then increase position size and use your edge.

Recommended books

Here is a small list of recommended trading books about this topic.

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Der Beitrag How to Reduce Trading Mistakes: 10 Tips erschien zuerst auf Trading Blog - Julian Komar.

Below you find my top 10 learnings. I collect that wisdom from my mentors, Market Wizards and other traders. They helped me to get better and better as a trader.

1. Chart your own equity curve

This is a recent advice I learned from Olivier Tischendorf. He wrote a great article about that: How To Profit From Charting Your Own Equity Curve.

If you chart your own equity curve day by day you will have a direct feedback of your trading. You know exactly how you perform, when it’s time to be aggressive and when it’s time to step on the break.

More information in my own article: Learn to manage your own equity curve.

2. Sell a trade quickly if it drops below the breakout point

I am convinced that a trade should be a winner directly from the beginning. All my huge winning trades shows that characteristic. If the trade instead is falling back below your entry point you should sell it quickly. Something seems to be wrong.

Such a radical trade management is not an approach for everyone. You must be very disciplined. But the good thing is you can lower your average loser a lot.

Learn more about it: An example in trade management – the breakout stop.

3. Trade only the strong stocks

There was a time in my trading career where I trade stocks which dropped and then started a new trend. You can name such stocks as reversal stock or turnaround stocks. There is nothing wrong with this approach but it’s not mine. I was never good in it.

Instead I learned to select leading stocks which are strong, printing new all-time highs and show strong volume characteristics. It helped me a lot!

4. Focus on a trading niche

Of course there are traders out there which are flexible and can trade any market. But that’s not me! I believe in focusing on a trading niche. That’s the only way you can gain a lot of experience.

I focus mainly on momentum stocks and leave other markets for other traders. Rarely I trade forex, commodities or indices.

5. Day traders, swing trades and scalpers do not make more money as other traders

A long time I believed that fast traders are making more money that slow traders. But always if I looked into a trade record of a day trader or scalper I noted that’s not true! In a lot of cases the long term oriented traders made more money. How is it possible? Simple: 5% a month is 5%. The approach to create 5% is not important.

That does not mean that there are no good day traders out there. It only means that you don’t have to be a day trader to make a lot of money.

6. Excessive risk-takers are mostly bankrupt

I always was blended by social traders which had accounts with profits of 400% or 1000% in a short time. I always asked myself: How did they do that?

One day I saw a social trading account of such a trader. It has a draw down of 90%! That’s pure gambling. Of course there is a possibility to recover from that. But in the most cases they close the account and start a new one.

7. Clean and simple charts are the best

If you believe you have to make complex technical analysis, you are wrong. I found out that the best trades have very simple chart patterns. There is no volatility and huge price swings. Follow Patrick Walker on Twitter and you will learn a lot about “clean and simple”.

8. Do everything to protect your confidence

Today I know how important confidence is as a trader. But there is not a universal truth what confidence means. Maybe for you it’s your rule-set and blindly follow them. For another trader it’s his ability to select good stocks. The only thing which all have in common is that they believe deeply in their principles. And that’s why you have to defend your principles and believes against any threat.

There are times when my equity curve shows high volatility. In such a time I start to close positions. Yes, sometimes they still fulfill all rules and maybe I am cutting potential profits, but my confidence is more important. If you have a deep draw down you don’t only lose money but mental capital, too! Ed Seykota said famously: You have to know when it’s time to break your rules.

9. There is intuition in trading

There is a myth in trading that you should act like a robot. There was a time when I believed this myth, too. But today I look differently on that thing because I read a lot about the brain and intuition.

Intuition developed with experience. The more you learn about a thing the more intuitive you get about it. It’s like driving a car or cooking. You know exactly what to do without thinking about it deeply. That same experience you can have in trading, too. If you look at hundreds of chats a week, you intuitive know which one looks good and bad.

10. Working on yourself is the best method to mastery

As I started to read books about motivation, psychology, self-development, philosophy and time management I not only got better in my job, I got better as a trader, too. The basing principles of success are the same in any job. You doing outside of your job influences your job.

I absolutely recommend not to read only trading books. Start to read books about self-development and -management, too. You will find a lot of inspiration and you can transfer a lot of methods into your trading world.

Recommended books

Here is a small list of recommended trading books about this topic.

[amazon box=”0735201447,1848549253,014312417X,0062315005″]

Der Beitrag The 10 Best Trading Tips I learned from other Traders erschien zuerst auf Trading Blog - Julian Komar.

But how to gain this confidence in your own trading? Is the only way to wait 20 years and make thousand of trades?

In the last months I thought a lot about “mental capital“. With mental capital I mean the trust and confidence in your own trading. This can increase and decrease, depending on your experiences in the market. Example: As big loss can decrease your mental capital which leads to a more defensive behavior. The opposite is possible, too. A big profitable trade can boost your confidence and leads to over-trading.

It always comes back to trading psychology … If you call it mental capital, trust or confidence is irrelevant. But I made some experiences which I want to share with you.

5 points to build up more confidence in your trading

Here are some points and experiences which helps me to gain confidence in my trading:

1. Charting your equity curve: This helped me a lot. It brings transparency in your trading and shows the results of your action. Especially if you have an edge in the market it will boost your confidence because your equity curve is going up!
2. Positive outcome: If your trading is profitable it helps you to get more confidence. It’s not important how much you are making, it’s more important that your trading process results in a positive outcome. If you are not profitable, change or optimize the process.
3. Tweak your approach: You must tweak your trading approach until it matches your personality. F.e. I implemented a scaling out tactic because I hate it to give back too much of my open profits. This leads to a smoother equity curve and increased my trust.
4. Rules and best practices: Always if you see that a rule helps you in your trading, you build up confidence. Especially risk management rules are a good example. I hate too loose much of my capital in draw downs. That’s why I have risk- and money management rules to reduce my position size and cut my losses strictly. I have a high confidence in that rule-set because it prevented me of big losses and draw downs.
5. Have a positive mindset: You must work on your long-term mindset. If you don’t think that you can make it as a trader, it will block you form a positive outcome. You must develop self-confidence and a positive self-attitude. Read books about success, motivation and role-models. Look how they did it and look that they startet the same way as you …

Why confidence is so important

I startet with the points to build up confidence, because I gives you some practical examples. But the you must understand the background why confidence is important, too.

In trading all comes down to the psychology. Markets and trader are driven by emotions. This is true for systematic trader, too. There are hundreds of ways to sabotage automatic trading systems. But especially as a discretionary trader you have to know how your confidence influences your trading.

I would say: The more confident you are, the better are your results. Why? Look at these points:

1. You will take your signals, because you know that it will end in a positive outcome.
2. Rules will be accepted and followed. You saw that they had a positive influence.
3. You are in a state of “flow” where everything is easy and fun.
4. Every trading opportunity is recognized and evaluated. You take only the best situations because it matches your plan.

You can see that confidence has a direct influence on your trading. This is why you have to maintain it and never decrease it. The decrease will come automatically in that times if your trading is not working.

But be warned: Too much confidence is a problem! You want not to be over-confident, because it will bring you to fall. With a too high confidence you will sabotage your plan, make too big bets and think everything will go on and on. But the markets and trading are never linear. One day the mood of the markets will change and your trading is not working (for some time).

5 points to maintain confidence in your trading

Maintain and build-up confidence is nearly identical. But to maintain confidence your had to build it up first. That’s why you know to do it.

Here are some tips for maintaining confidence in your trading:

1. Look back at your results: Analyse your equity curve and trades. Why did it work? What was the situation in the market where your trading worked? You must be clear about the time your trading approach works.
2. Trading is a craft and skill: Be sure that the mindset of a trader is adaptive. It’s not rigid to one market or approach. If the stock market is a bearish situation look at other markets. Can you apply your trading approach to forex, commodities or fixed income? What’s about inverse ETFs?
3. Distract yourself: If you have no edge in the market, do not apply your trading approach. I know, I want to be in the markets all the time too, but this leads to losses. That’s why I do other things if my trading is not working: Reading, writing, analyzing, other businesses … If you try to trade a trading system with no edge, your trust in that system will be pulverized over a short term.
4. Have role models or mentors: Especially if you are a beginner, you need role models or a mentor. They solved a lot of problems and overcome a lot of situations. You can profit from their confidence and experience.
5. Work on your mindset: Have a long-term perspective. Think about the next 1000snd trades and 20 years. I know it’s hard, but you will not make millions of dollars in a short time. Of course I want to do this, too, but that’s not how trading works. If you want to have the chance of a million dollar with one click: Play the lottery! Instead read some good books and blogs about motivation, success and self-help.

Like everything else you have to find your own way. I stumbled about a nice quote: I don’t think trading can be taught, but it can be learned (source unknown). I am sure that everyone who want’s to be a market wizard will find a way. And she or he will find a way to build up and maintain confidence in their person and trading.

Recommended books

Here is a small list of recommended trading books about this topic.

[amazon box=”0735201447,1118273052,0996307923″]

Der Beitrag Build and maintain confidence as a trader erschien zuerst auf Trading Blog - Julian Komar.