5 mistakes that make traders go broke

I remember a spell of making spectacular money week after week.

It came early in my trading days when I was young and foolish.

So when one particular Thursday rolled around with no loot in the weekly sack I simply entered a long position before an economic report. In some weird and twisted way I felt I ‘deserved’ to be rewarded by the market.

There really was no reasoning beyond this trade. It was an out-and-out gamble.

From memory that one paid off but my luck didn’t hold much longer.

I was fortunate to be shown the error of my ways while I was trading a small account because it could have ended much, much, worse.

But I took the hint: it was time to wipe my mouth and start afresh with a proper trading plan. No gambling!

So do you ever feel you’re not quite in control of your trading actions – your fear of missing out on a plum-move drives your decisions rather than a proven trading plan?

If you’re not sure, let me tell you exactly what signs to look for…

5 signs you’re gambling instead of trading (and what to do about it):

  • You’re trading without a proven strategy. Without a sound strategy you really are stabbing in the dark. The right to trade intuitively – where you place trades based on gut feel – needs to be earned. You need to put serious screen-time in before you start getting a subconscious feel for market activity.

Solution: Stop trading and get yourself a proven strategy that delivers long-term positive expectancy! Design one yourself or pick up a copy of a tested and proven commercially available strategy to cut your teeth on (look for one that has a solid history of results so you know it works).

  • You’re trading without a plan that tells you exactly what to do, and when. The trading plan tells you how, when, and where to deploy your strategy. You should be left in no doubt what you need to do when (it should even tell you when you should stay clear of the markets – staying flat is a perfectly legitimate position of its own).

Solution: Get your trading plan down on paper and keep it where you can see it as you trade (good commercial strategies provide you with a plan to trade by). Remember the ‘5P’ maxim: Prior Planning Prevents Poor Performance

  • You have no risk management measures in place. Do you have a method of measuring how much to risk on each trade? It can be as simple as breaking down your account into 1% ‘Units’ and risking a single unit on each trade. The location of the stop loss order will let you calculate how many units to risk, and may even keep you out of volatile markets completely – the risk may be too great for your account size on certain trades.

Solution: No risk management in place? Read Trade Your Way to Financial Freedom (Van Tharp)

  • You take ‘revenge trades’ or you try to jump on breakout moves in the heat of the moment.We’re moving into real gunslinger territory now. I know it can be incredibly hard to watch the market take out your stop loss only to reverse and head back in the ‘right’ direction. It’s so temping to bang-in a quick order to show the market you were right in the first place and even-up the scores.

Or equally as bad: trying to jump on a breakout move just because you notice momentum in a particular market. It’s fine if it’s part of your plan but a ticking time bomb if you’re winging it.

Solution: Try moving out to trade on a longer time frame. Instead of day trading or scalping by the minute, move out to hourly or daily charts. It can slow you down and make you give full consideration to your decisions before you pull the trigger.

  • You let emotions begin to dictate your ability to place trades.If you’re not taking all the trades your plan says you should then you are gambling. You might feel like you’re playing it safe by dodging the odd trade that ‘looked bad’. But by doing so you’re riding rough-shod over the probability and expectancy of your strategy. Missing out trades can be just as bad as firing off orders willy-nilly. It does require a bit of mental toughness but this truly is the essence of success in the markets.

Solution: Stop trading, scale back the money you’re risking or even move onto a demo account. Go back to a level at which you can make decisions clearly with no emotional attachment to monetary loss. Test the waters tentatively as you trade bigger again. Growth may be something you need to work through in incremental stages.

Take a good hard look at the mistakes on this list and hold your own trading activities up against them.

There’ll be a lot of short-term traders adjusting their strategies at the moment. They’ll be trying to find a new foothold in the markets after the recent ESMA regulations came in. So it’s a good time to check whatever changes YOU might have made isn’t leading you into ‘Wild West’ territory.

Trade safely (no gambling!) and I’ll catch up with again next week.

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