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Losing? How to Figure Out Where You Are Going Wrong

Jul 12, 2008
One of the most common questions asked by struggling traders is "where am I going wrong?". There can often appear to be such a mind boggling array of variables in trading, that it seems impossible to unravel the primary issues.

When you strip away your emotions on the subject and look at your situation with cold hard analysis, there are really only two main variables:

1. Are you using a profitable trading system?

In other words is your trading method giving you entry and exit signals which if executed correctly lead to profit, in the balance of trades. Do you know your trading system's expectancy?

You would be amazed at how many traders can't answer this question. For many traders in their first few years of trading, the market has such an aura of mystery about it, and there are so many details in terms of charting, order entry, brokers etc. that they forget to ask the most obvious of questions. Don't be one of these traders! Don't be willing to go out and risk your hard earned money on hope. You wouldn't drive your car somewhere unless you had a reasonable certainty that it was going to get you where you wanted to go. You wouldn't eat food unless you were reasonably certain that it wouldn't make you sick. So why trade without knowing what to expect from your trading system?

If you want to gamble, surely it would be more fun to go and bet on a sports game? Despite what some may say, serious trading is not gambling. The profitable trader knows exactly what to expect from his system over time. He won't be able to tell you if his next trade will be profitable, but over a week or month he should be able to tell you with reasonable accuracy his trading system's expectancy.

So test your system, either using the back testing functionality of your charting package, or by paper trading it over an extended period. Knowing the expectancy of your trading system is your foundation, without it you have NOTHING! Really, NOTHING! Without knowing your trading method's expectancy you are building a house on sand.

This first step is really a gate keeper. If your trading method is not profitable there is no point in going any further.

2. Execution

Once you know for certain that your trading method has is (or has the expectancy to be) profitable, the only other variable is executing it correctly. Yes, you may be saying "duh!", that's really obvious. But when you boil your trading down to these two simple variables - when you know what to expect from your system - then you can place 100% undivided focus on mastering your ability to execute your trading system.

The mistake that many traders make is focusing on the wrong thing. Your job isn't being the trading system! Its not to decide which trades look promising. That's the job of your system or method. You should have a set of rules which tell you this, which you follow. Unless you are incredibly experienced or have psychic powers, don't do discretionary trading. Don't get lost in price movement and make up the rules as you go along.

Your job, your only job, is to sit patiently and wait for your system or method to indicate that its time to enter - and then with great focus, you execute the trade as planned, and you get out again either at the predetermined profit targets, or when your stop loss gets triggered.

I know this seems really basic, but remember that 99% of traders fail because they either don't have a profitable system, or because even with a profitable system they don't follow it. Taking trades not indicated by the system, second guessing the system and not taking trades given, hesitating and getting in late, anticipating and getting in early - these are all commonplace. They all boil down to a lack of faith in the system, and not having a burning focus on accurate execution.

Where does mindset fit in here? Focus on staying focused - on execution. Make it a meditation. The more you develop the ability to step back from price movement and watch the market dispassionately - waiting for a signal to trade, the easier it will be to master your emotions. The easier it will be to witness the fluctuations of your emotions without getting sucked in to them - and allowing them to throw you off your game.
About the Author
Mo Christiensen is one of the editors of the successful tradingadviceblog.com. The site specializes in high quality trading advice and profitable trading systems for new and struggling traders. See the original article in context at http://tradingadviceblog.com/intro/losing-how-to-figure-out-where-you-are-going-wrong/
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