Trading Winners and Losers
In trading, there are six major reasons traders lose money.
If you can avoid them then you can join the elite minority of winners that pile up the big profits consistently.
Here are six reasons traders lose money:
1. The Contrarians Trap
You conclude you should have a contrary opinion to other traders in the market, as most traders lose money, so you want to trade in opposition and win.
This argument however is flawed.
Most traders lose because they lack discipline and money management
They are very often right about market direction. It's their inability to maximize their opportunities and stay with the trend that makes them lose money.
Many traders are looking to pick tops and bottoms, and never focus on trend following.
Picking tops and bottoms is impossible.
You can't predict the turning points in any trading. You need to focus on trend following and not prediction.
2. The Chartists Trap
In trading many traders fall into the trap of putting all their efforts into studying charts.
Studying charts is important as we have stressed in other areas of this website, but you must not be too subjective, or you will end up losing your money.
Avoid methods that need too much subjective analysis, such as Elliot Wave and cycles and focus on indicators that define trends. Good examples are as moving averages, Bollinger bands and stochastics.
Learn to be objective and not subjective in your trading.
3. Your Ego
Trading attracts some of the cleverest and smartest people in the world.
These traders maybe smart - but they also have big egos.
An ego is a trait that has no place in trading. All it will do is make you see the market, as you want to see it - and not how it really is.
If you don't focus on the reality of the situation you will lose no matter how smart or clever you are.
Traders need to consider:
Do you want to make money or be smart?
The market won't accommodate both of these desires - if you want to make money, forget your ego and remember there is only one price that is right and that's the market price.
The humble trader, who has an objective defined and disciplined trading method, realizes the market can make him look stupid.
However, he's only interested in making money, and he'll generally out perform an ego filled trader, who wants to beat the market.
4. Guru Syndrome
When you're trading any market, it's often tempting to follow someone who's made money or says they have.
It's a fact that most traders want success given to them by someone else.
These traders can't take responsibility for their own actions and if you want to make money you need to.
If you can't accept this, then do something else for a living.
5. Chasing your Tail
Many traders get impatient when trading
They start trading using one method, get frustrated or bored with it when it's not performing - then switch to a different method, and continue in this manner and end up losing.
Bad periods are normally followed by good trading, so patience and discipline are needed.
By chopping and changing systems all the time, you'll end up losing money.
If you have a trading method that you have confidence in, stick with it
Stop chasing your tail!
Stay focused, disciplined and be patient with your system and if it based on sound logic you will be well rewarded.
6. Using Options
When you're trading, using options gives you staying power combined with limited risk, which makes options a great, flexible trading tool.
Many traders use options incorrectly.
They focus on buying options with little time value, and that are way out of the money. This is a guaranteed way to lose money!
In theory they can make you huge profits for a small stake. This however is the equivalent of betting on the rank outsider in a horse race and keep in mind the rank outsider very rarely wins.
What you need to do is switch focus to buying options, at, close to or in the money - with lots of time value.
Don't try and be too smart - the above pitfalls are made by some of the smartest cleverest people around.
In most cases these mistakes come from thinking you have to be clever, or use complicated methods to succeed.
Your method should be simple.
Make sure you keep your discipline, accept responsibility for your actions, and accept that the market will make you look a fool at times, don't worry it does it to everyone!
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