Tuesday, October 9, 2007

Seven Deadly Trading Mistakes - Part One

By studying at the most frequent reasons for failure, we can avoid making the same mistakes as the crowd, and thus turn these negative points into positives. In this series of articles, I will be looking at the seven most common mistakes I see made by traders.

Mistake Number One - Switching Strategies

or "The Hunt For The Holy Grail"

The holy grail of trading - we've all looked for it - the super system that never loses. We've searched forums, read books, been to seminars, discussed in chatrooms, but the secret system that wins every time continues to elude us.

Why do we waste so much time and effort searching for something that doesn't - cannot even - exist? Because it's far easier than facing up to the reality that trading isn't quite as simple as buying when a magic indicator says "buy" and selling when it says "sell", and watching the endless profits roll in.

Actually, it is almost a simple as that, but we'll come to that later in this series. For the moment, the important thing is, that there is no holy grail-always-wins trading system.

The grail hunt is a highly destructive behavioral pattern that affects almost every trader at some point in their career. Typically, the trader starts by learning a system or strategy, and trading it for a short period of time. The strategy may prove profitable almost immediately, or may incur an early loss. Either way, sooner or later a loss will happen, and equally inevitably, a run of losses will occur together. At this point, the trader decides that this is not the system for them, and heads off in search of a new method.

In jumping from system to system in this manner, the trader never gives a strategy time enough to prove itself over the long term. All systems involve some losing trades, that's the nature of the markets, but as long as a strategy has positive expectancy overall (that is to say, it will on average win more than it loses), those losses are of no importance.

Action: As traders, we must accept that fact that losses are to be expected, and stick to our chosen system for long enough to prove or disprove its expected long-term outcome. In doing so, we break the grail hunt cycle and overcome one of the biggest obstacles to our success.

As a final note on this subject, I want to add a word about forums and chatrooms. Whilst these are undoubedtly excellent sources of information and ideas, they can be very dangerous in fueling the cycle of strategy jumping. The nature of these resources means that they continually offer new ideas, and to the trader that means new temptations. By all means test out or paper trade new ideas alongside a live strategy, but beware of becoming a forum-follower and re-entering that pattern of always jumping aboard the 'next big thing'.

In the next article, I'm going to look at trading plans, and why failing to plan means planning to fail.

About The Author
Harvey Walsh is both a trader and trading coach. He can be contacted via his website, where you can also read more about his day trading book. day-trading-freedom.com