The Top 10 Mistakes Traders Make
By Richard Ilczyszyn ISSUE 802 | February 2009
Trading is a risky business. I’ve been in the business of trading for more than 15 years and I’ve seen traders come and go. Like many business startups, most beginning traders don’t make it past the first year. The most common mistakes, and some of the reasons why, are presented in this article.
1. Inadequate trading assets or improper money management.
When you open a trading account you are essentially starting up your own business. One of the main reasons why businesses fail in the first year is due to improper funding.
I’ve seen many beginning traders opening accounts with the bare minimum required, just to get their feet wet. Nothing is wrong with opening an account with the minimum required, but that money needs to be managed well. If you do this and try trading multiple markets, and ignore using stops, then you’re setting yourself up for failure.
The key to this business is to be over-capitalized and under-leveraged. In commodity trading, the volatility can work for or against you. Not every trade you make is going to be a winner. Losses are inevitable in this business, and just like a boxer should be able to take punches, your account should be able to sustain losses.
So how much does someone need to open a futures account? At Lind-Waldock the minimum required to open an account is $5,000. In my opinion $20,000 to $30,000 is appropriate if you a looking to get exposure in one or two markets. Of course, this also depends on the market you want to trade, your risk tolerance and your overall financial position. If you’d like to trade a specific market, but are unaware of how much capital would be needed, feel free to give me a call at 800-605-0095.
2. Failure to have a trading plan in place before a trade is executed.
It is critical to have a trading plan that outlines how you enter and exit trades. Most people find it easy to get into a trade, but have the most trouble getting out of a trade. Where will you take your profits? When will you cut your losses? These are called risk parameters and profit targets. You need to have everything thought out before entering a trade.
3. Expectations that are too high, too soon.
The coaching advice I always give my clients is that you can’t hit home runs all the time. Base-hits, doubles and triples are what make a good baseball team, and the same goes for trading. Some traders try to squeeze every nickel out of a trade and thus end up missing dollars.
If you day trade the S&P 500, and the average daily range is 20 points, you would be considered successful if you caught 10 points from a trade. There’s no need to try and catch every move in the market.
4. Failure to use protective stops.
Some traders don’t use stops because they feel there is some sort of conspiracy in that the market fishes out their specific orders, stops them out, and then continues the way they originally anticipated. This is simply not true.
Protective stops can keep your trading disciplined. The only way I would recommend not using stops is if you’re absolutely certain that you will be getting out at certain points. On my trading desk, some clients ask that I call them when the market reaches a certain point. At that point, the client decides the next action to be taken.
5. Lack of "patience" and "discipline."
This is a rookie mistake. In May of last year, crude oil was well over $100 a barrel. Of course, we all know where this story went. The market sold off and continued to fall to around $40 where it is today. I noticed that there were many more people trying to buy crude oil when it was at $120, than when it recently traded closer to $30, which I think is a value area. This shows a lack of patience in traders that want to get into a market that has already made most of its gains. Usually at this point, it’s already too late. And many traders that went long crude oil around May saw that in the months that followed.
A disciplined trader will realize an opportunity was missed and will not try to chase a trade. If you trade commodity futures, there will always be opportunities in certain markets. Some of the markets may go down for a while, others may trade sideways for a while, but I can guarantee you that there will always be volatility. Prices will continue to fluctuate and opportunities will continue to present themselves.
6. Trading against the trend--or trying to pick tops and bottoms in markets.
Picking tops and bottoms in the market can be dangerous. If you think about it, a top or bottom can only occur at one point. Yet many traders feel they can pick this particular point. The fact of the matter is that nobody can. And if they do, they were probably lucky.
Take crude oil for example. Remember when it was trading around $30 a barrel a few years ago? As it began rallying toward $50, many were calling a top, citing $50 as a resistance point. Then it rallied toward $80, where more were calling a top, saying it could go no higher. Then $100 became the new resistance point. You can easily see how dangerous picking a top was as crude oil approached $150. Those choosing $50 as a top were clearly wrong in a big way.
7. Letting losing positions ride too long.
This seems like common sense, but this is a common mistake among many traders. Here’s some very basic advice: If you think the market is going to go up, and it violates your support level, then get out. This means being a reality-based trader. If you were wrong, admit it, and get on with things. Admitting that you were wrong is very hard to do, and this is why many let their losing positions ride too long. Successful traders will not sit with losers.
8. Over-trading.
This can happen to anybody. If you lock yourself in a room and stare at a 1-minute bar chart you’re going to go nuts. You’re going to see things that aren’t there and you’ll force yourself to trade more than you should.
I’ve seen it many times where traders come off a successful trade and then feel as though they have everything figured out and try to get even more out of the market. The reason you’re trading is so that you can make some money without destroying your account. You don’t have sit in front of a computer all day and trade. Treat yourself. If you make a profit, don’t get greedy. I used to have a rule when I was trading on the floor. If I hit my financial goal for the day, I’d take it and leave for the day, and enjoy myself.
9. Failure to accept complete responsibility for your own actions.
These are the guys that have excuses for everything. “It would have been a successful trade, but…” You need to be accountable for orders that you place. Part of this is a mind game. You need to be in check of all your emotions to make good, quick decisions. You’re not always going to be right and you can’t get down on yourself when you’re wrong.
When I traded on the floor, I noticed some of the best traders would not show any emotion. You couldn’t tell if they made or lost money during the day. Successful traders don’t make excuses. They realize that losses are part of the business and accept responsibility for their own actions.
10. Not getting a bigger-picture perspective on a market.
If you’re looking at a chart that only covers one week, it can look completely different if you expanded it to cover the entire year. What appears to be a sharp downtrend in a chart covering only one week, can be a minor correction in a major rally that has been happening for an entire year. Keeping the big picture in mind is very important. When you get caught up in the details, it’s very easy to lose sight of the big picture.
If you want to get a big picture of the market, while keeping an eye on the details, I have a free hotline that I do every morning at 6:30 a.m. CT. You can hear this daily recorded audio at (312) 788-2993 throughout the trading day. I give trading strategies and alerts on what to watch for in the market for that day.
Richard Ilczyszyn is a Senior Market Strategist and Lind Plus, the broker-assisted division of Lind-Waldock. He can be reached at (800) 605-0095 or by email at rilczyszyn@lind-waldock.com.
Kristina Landgraf is editor of Lind eWire. She can be reached at editor@lind-waldock.com.
Futures trading involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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