What Is The Weakest Link In Your Trading Chain ?
It probably comes as no surprise when I say that ‘YOU’ are standing in your own way when it comes to trading success and success in your life in general. It may sound like I am reinforcing a negative here, but sometimes we must take responsibility for our own negative actions and face the reality of our lives head-on. In trading and typically our lives, this negativity is all about us; our egos, actions, and emotions in the market.
However, rather than focusing only on the negative, we are going to turn the negative into positive in today’s article by showing you how to break through these barriers to success which should open the floodgates to profits and an overall happier lifestyle.
I want you to imagine the points below as links in a chain, and remember that it only takes one link to weaken for the chain to snap, so you really need to have all of these in order…
EGO of the mind
Being that trading is mostly dominated by men, the male ego can be a massive problem – studies have shown that females succeed over men in trading because they are not over-confident in their abilities like men often are. The hormones drive the ego, and men clearly have more of a risk-taking nature due to their higher levels of confidence (ego) which is partially fueled by testosterone. In the trading realm, this typically leads to taking too many risks or too big for risks or both. Women are much more level-headed when it comes to financial risks and tend to be better risk managers. In fact, this is a fairly well-documented fact which has been studied by distinguished behavioral economists Brad Barber and Terrence Odean who are renowned for their seminal research piece ”Boys will be Boys: Gender, Overconfidence and Common Stock Investment.”
Thus, if you are a man, which you most likely are (men are the larger trading demographic), you are already at a significant disadvantage when it comes to trading simply due to how we are designed and wired. This doesn’t mean you’re doomed to fail, it just means you need to be more self-aware and certainly be aware that your hormones and ego may be negatively influencing your trading and causing you to feel like Superman when in fact you are Clark Kent, so to speak. This issue of the ego can be overcome by proper training, planning, and discipline (learning from a mentor, sticking to your plan etc.).
People tend to trade on a whim, but the market knows best, price knows more than you.
When people look at a chart, an obvious signal can be staring at them in black and white but that doesn’t mean they will take advantage of it. People tend to trade what they think and do what they think rather than what the market is telling them through evidence, I have an article which explains this more in-depth, called trade what you see not what you think. Remember, if you see a signal, trade what you see in front of you, don’t second guess yourself.
It’s important that you are accountable to your plan and the price action strategies included in your plan, but all too often it doesn’t matter how much a person has studied and practiced, sometimes the ‘3rd eye’ (the mind) of the trader takes over and it really can be quite random. Never label yourself a ‘bull’ or ‘bear’, instead, adapt to market conditions as they unfold and don’t get attached to your direction or bias of the market even in the face of objective evidence telling your bias may be wrong.
I may sound like a broken record because I’ve probably talked about this a million times on this blog over the years, but it’s no secret that successful traders practice a sickening degree of patience. However, I am not talking about just any ordinary kind of patience, I am talking about the most counter-intuitive emotion that a person must deal with in all aspects of life; fighting the need for instant gratification. We are programmed to want instant gratification and as traders we are constantly fighting these genes which make us feel like we need instant results. Standing aside is a strategy in and of itself, this is part of patience. Part of patience is also letting trades play out and not becoming over-involved or micro-managing them.
The ‘need’ to be right, rather than admitting when you’re wrong
Generally speaking, humans have an instinctive need to be right and have a very hard time admitting when they’re wrong, and this is financially catastrophic in the trading world. Subconsciously, most traders would rather lose than admit they’re wrong, this is especially true for beginners who don’t even know they’re doing this in many cases. We are genetically programmed to believe we are right, so when we are faced with a loss we must fight our natural tendency to want to hold losers and learn to cut losses with no exceptions.
As the great Warren Buffet has famously said:
I’ve never met a profitable day trader
I know you want to be a ‘cool’ day trader (yawn), but I’ve actually never met a successful one. I assume, like me, you got into trading to have an opportunity to enjoy your life more, right? Why then, are you sitting around looking at your screen all day trying to be a ‘gung-ho’ day-trader?
The fact is, the more you trade, the less likely you are to succeed in the markets, there have been many studies that have shown this. It’s due to multiple factors but the main ones are because when you trade more frequently you are naturally approaching a more random trading method, since much of the market movement on any given day is simply noise with no real meaning. Also, transaction costs add up the more you trade, cutting into your profits if you have any. For more on this topic read my article on high frequency vs low frequency trading and please check out my article on why I hate day trading.
Most people don’t think about trading in this way but it’s helped me…
You’re trading against other people, right? So, traders should look at trading as a sport / competition against others. Most people fail to do this, but if you walked onto a sporting field and started playing soccer and believed you were playing against a computer game, it would be hard to believe you could win because it would be hard to get motivated like you are when you know you’re playing against another human. So, if you look at your trading like you’re trading against another person, you would automatically have more confidence that you can win. Remember that in trading, people are your opponent, not simply ‘the market’, doing this will develop a competitive confidence that you can beat your opponent. This applies to business, sport and finance. It removes the barrier of ‘me vs everything’ and makes it into “me vs. you”.
Each trade is about the trade, not about how much money you won or lost.
The outcome of your trade should be about the trade itself, not about profits, losses, percentages or anything else. Read that sentence again.
People become far too caught up in how much money they lost or won or how much they could have lost or won, rather than looking at trading like a business and remembering that every transaction over the month adds up to the monthly profit and loss. In effect, each trade is simply part of doing business and the moment you start thinking about individual dollars risked or gained on a trade, your psyche will begin to suffer and as a result, your trading will too.
You need to completely treat the act of trading like a sportsman on a field treats the act of playing his sport by separating the income you’re making from the activity. This is similar to the concepts I put forward in an article I wrote titled Focus on trading not the money, but I think perhaps this discussion is even deeper than previous ones. You’re mastering the activity of trading and honing the skill, money doesn’t come into the equation, the only time it comes into the equation is when you tally up the pluses and minuses at the end of the year. In this way, trading is viewed as more of a game or a competition you must become skilled at to win, and the only way to win at it is to remove money from the equation. Of course, the money will always be there, but the point is, the more you focus on it, the more distracted you will become from the actions and thoughts you need to take to be profitable.
It’s also important that traders don’t measure profits based on percentages or pips gained or lost on each trade or based on the percentage account performance over xyz period of time. Instead, traders should measure results and score performance using units or ‘R’ (total risk units based on risk vs reward). I wrote an in depth article a while back discussing the importance of measuring trading performance in units of R, not percentages or pips – here.
I’ve put together my trading courses with real-world trading experiences in mind and those experiences incorporate the links of the trading ‘chain’ that I discussed above. Many financial market educators and bloggers who teach aspects of trading are simply selling you the ‘next best’ entry technique, however, even if you had some Holy-Grail entry technique…. if any of the above links of your trading ‘chain’ are weak or broken, you’re destined to fail. If you make sure all of the ‘chain links’ mentioned above are strong and combine that with even a simple trading strategy, you’re destined to do big things in the trading world.
TELL ME WHAT’S YOUR WEAKEST LINK ? – PLEASE LEAVE A COMMENT BELOW :)
Any questions or feedback? Contact me here.
13 Comments Leave a Comment
Thank you sir, this is a great article. I think my weakest link is trading my plan and patience.
Remember that in trading, people are your opponent, not simply ‘the market’, doing this will develop a competitive confidence that you can beat your opponent
My weakest link is to buy the top more especially when I think it’s a retrace in an uptrending market
” Rule 1 …never lose money. Rule 2… never forget rule1″…so so true…!
How do you achieve that… 1, You use low leverage and 2, Trade less.
The killer is the leverage 1: 1000, 1: 500, 1: 200, 1: 100, 1: 50, 1: 10, 1: 5, will
squeeze you out of the market. Yes, talking from experience. I trade ECN mt4
and i leverage on 1:1….! O boy. its an eye opener….never lose money again..!!!
Thanks Nail and thumps up for you.
Thanks Nial for another great article. My biggest problem is also patient, but i know with time ill be a profitable trader.
Patience. Having recently joined your course, I am improving.
“Remember that in trading, people are your opponent, not simply ‘the market’, doing this will develop a competitive confidence that you can beat your opponent.”
This part of the article is an eye-opener for me. Thanks Nial Fuller.
Hi Nial…I must say I have improved tremendously in my trading ever since I started about two years ago. I have burnt many accounts due to day trading… Till i started to focus on daily charts and doing my analysis over the weekend…I have moved my percentage from 30% to 80% in a space of 6 months… However my main problem is still letting my trades play out… I tend to focus on how much money is profit rather than letting it hit my target… Lastly I must say it has been a pleasure getting lessons from you…
Hello Sir, it’s a great article and u really did hit the nail on my head…I must admit….I think my weakest link is lack of sufficient patience I suppose….
I’m kinder doing better now in trading ever since I started following Nail.I had all these problems mentioned above.ie trading short time frames and puttin unchecked lots on one trade or even placing more than enough trades on one loosing trade and worst I was always checking my trades second anfter second.by doing that I was loosing every trade and every deposit I make and I started cursing and thinking that brokers are trading against me and the whole lot of crap.but I met this guy and I took one thing and caped it when he said “long time trades give more results than short term trades.then I started adjusting my mentality in trading.I give my self time to wait for each trade to play out as planed aithe positive or stopped out is fine as long as its all according to plan and part of my check list.thanks Nail.
I don’t really see the problem in measuring your performance in % terms at the end of every month!?