Top Mistake To Avoid Learning To Trade & Invest

In earlier posts we started to cover some of the common and more unusual mistakes most traders make when learning to trade and invest in the financial markets – follow this link. One of the most significant is what I call ‘emotional blindness or fog’ and is a natural reaction to a losing position in a high-class trading opportunity.

The good news is that this emotional struggle can be easily controlled and flipped around, and the outcome is then a sudden sharp boost in the number and frequency of winning positions. It is not an easy fix as it involves a lot of hard work, but far better that than finding the trader has quit the industry out of sheer frustration following long sequences of losing trades. This in turn has a powerful, positive impact on the trader in terms of his or her psychology.

The Trading Setup

The assumption is that the trader has some experience and skill giving him a level of control over the markets: that he is correctly analysing the technical situation of the stock, commodity, or other asset class: He is able to read:

  • trend
  • status of the market
  • direction of the current price leg
  • character and direction of the next available trade
  • potential levels and timings of those specific opportunities
  • invalidity level and the total risk in the trade
  • realistic profit opportunities

He begins to plan out a trade: specifying an entry, stop loss and profit target. It aligns with the immediate trend in that time frame and should be the next impulse leg higher or lower. He assesses the quality of the trading opportunity as excellent with an acceptable level of risk. He literally falls in love with this opportunity and has a high expectation of success.

The mistake is made, hardened and reinforced.

Multiple Not Single Trade Entry

Rarely, if ever, is there a single entry into a trading opportunity; there are typically two or more.

But he has pinned all hope on the one crafted, ignoring the possibility of others. If it fails, the cost is much greater than just the financial loss. He will start questioning everything from his skill, experience, and abilities, to whether it is possible to make money trading and whether he is cut out for it. This damage is deep and lasting, a terminal destroyer of confidence.

[11:16] Kevin Mezzone

When the position fails, red fog descends, temper and bile surface and anything within reach becomes vulnerable to reprisal. (I have witnessed a pc exit an office building through a first-floor closed window in such a situation – remember that one Gary?)

And, while the trader is away tussling with his emotions, the market strikes the second ‘hidden’ entry and smartly moves in the correct direction, heaping even more misery on the trader when he next views the opportunity. (He has been outside, cleaning up the wreckage of the smashed pc and window).

In this situation, it is either win or lose, black or white – binary! There is no room for an alternative. However, better training in technical analysis and practical trading would undoubtedly improve the trader’s approach and performance metrics.

Had the trader started from the realistic situation that there is more than one high probability entry into the trade, there is already an acceptance that his first trade may fail. His mind and approach to the trade are balanced and objective. It also means that he has planned alternatives:

  • He can choose not to take any further positions in the opportunity
  • He has identified alternative high probability trade entries that he can take

And here is the key to this whole situation. If the trader’s original analysis is correct, then the subsequent later entries increase the probability of success.

It is a little like an elastic band, especially when taking an impulse leg as the market reengages with the in-play trend. The first corrective leg stretches the band, while later entries have very little further flex in a now extremely taut band. In other words, the odds keep stacking up in favour of value moving in the direction of the trend.

But rather than thinking about the market and trading opportunities in this way, the emotional trader vents his anger at yet another losing trade. In contrast, the experienced trader is focused, planning his next step should the initial position be stopped out for a small loser

Does this Situation Resonate with You?

If this sometimes sounds like you, why not join one of our free preview sessions and see how we approach the markets. Unless you understand price action at the right-hand edge of the chart, then you, too, may be venturing down this same dead-end path. Follow this link to register for one of the weekday evening or a weekend morning previews

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