Forex

Bad Habits of Untrained Traders

rickwright
Rick Wright
Instructor

Hello traders! In this week’s newsletter, I’d like to describe what a typical classroom consists of, and why you might fit into one of our forex classes. In addition, I’d like to address a couple of bad habits that keep people from making the type of profits they want in the marketplace.

In every Online Trading Academy class that I teach, we have an interesting cross-section of people who attend. Nearly every profession has walked through our doors-bartenders, soldiers, pilots, real estate agents, even professional athletes. Very often we will have brand new traders walk into class, who have absolutely no idea what they are in for. Sitting next to them will be someone who has traded for years, but just can’t seem to put the puzzle pieces together to make themselves a profitable trader. Sitting next to them might be one of our veteran student traders, who may be expanding their repertoire into a new asset class, or just wanting to connect with some traders face to face.

Believe it or not, this diverse mix is great in our classroom environment! Because we foster a team environment, if someone is brand new to trading and isn’t sure even how to enter a trade, the experienced trader next to them will often help with how to use the new trading software. The brand new student/trader actually has an advantage over the experienced trader, in my opinion. The experienced trader but new student in our classes must be unhappy with their performance in the market which is why they came to us! Have you ever heard the old phrase about unlearning old, bad habits? Very often an experienced trader will be relying on some combination of support and resistance, indicators/oscillators, and whatever things they have attempted to use in the past. Even though those techniques aren’t making them the money that they want, many still cling to them as a security blanket. This new world of nearly naked charts with only supply and demand can be very uncomfortable to use at first. “It should not be that easy!” is a common comment in class. After watching the instructor take trades in front of them in the live market, most are quickly reassured that our supply and demand zones can be very profitable!

bad habits that keep traders from making a profitSo what are some of the bad habits that people bring to class? One of the worst/funniest/saddest examples is someone who refuses to take a small loss. As traders, small losses are how we stay in business long term; large losses will kill your performance, if not blow up your account! I had a student a few months ago (May, if I remember correctly) who proudly stated on day one of class that he hadn’t taken a loss yet that year. Myself and the other students were impressed. So I asked how this was possible, did he only take a couple of trades so far this year? Sadly, the answer was no. Of the numerous trades he had taken, when he had a small winner, some “green on the screen,” he would quickly take his profits. “No one ever went broke taking profits!” And no one ever traded for long taking small winners like he did. So what happened when a trade went against him? As you may have guessed, he chose to hang on to the trades until they came back to break even.  Which means he had an account full of large losing trades, eating up all of his buying power, and he was unable to take any more trades because he was holding on to a bunch of losers. A bit funny and sad, if you ask me.  “But they are good companies!” he said. Good companies don’t always have stocks that go up. And bad companies don’t always have stocks that go down. (I know this is a forex newsletter, but since I teach our equities and futures classes as well, I thought I would throw in this memorable story.)

Another serious mistake traders can make is “averaging down” on a losing trade. Sadly, this is a commonly espoused investing/trading technique. If you buy 100 shares at $60, if it goes to $40, you buy 100 more to bring your average cost down to $50. That way it only has to go to $50 to break even! Hurray! What happens if the stock goes to $30? And then $20? How many of these trades in a year does it take to severely hurt your annual performance? Only one or two, more than likely. The professional traders I know cut their losing trades quickly, and only add to a position when it is going their direction.

The last mistake I’ll address this week is the matter of over-leveraging. Often a new trader will trade too big a position size for their account. Usually we recommend someone risk up to 2% of their account on a trade, with the expectation to make 6%. Many new traders will end up risking 5-25% of their account! Doesn’t take too many losing trades in a row to wipe out their trading account!  Most professional traders look at the risk of a trade first, while new traders will look at the reward. Obviously we believe that is backwards.

Hope to see you in my next diverse class of students, and in the meantime, don’t make these terrible mistakes into habits!

Until next time,

Rick Wright

rwright@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.