How to Avoid the 3 Most Common Causes of Trading Failure

How to Avoid the 3 Most Common Causes of Trading Failure

At the start of our last hour together I asked Joel whether he had any questions about anything I had taught him. I’ll never forget his response.  “I only have one question”, he said.  He had my full attention.  “Can you tell me if natural gas is going to keep going up?” It turned out that Joel was long his entire account in natural gas futures contracts. He didn’t want to learn a better way to trade. He only wanted to know whether he was currently in the right trade.

Since Joel had flown a long way and was paying a considerable fee for my advice, I agreed to look at the chart. It was quite plain to me that the recent breakout in NG (this was late 2011) was what traders call a “head-fake”; i.e., it was likely to reverse course very soon.I suggested to Joel that he cut his position size in half and put a stop-loss at his entry on the rest. He said a polite “no” to both suggestions, then flew over twenty hours back home. Less than three weeks later, natural gas was down over 20%, a loss that would have wiped out his account – futures contracts are highly leveraged – and then some. I never learned whether Joel cut that loss, but I suspect he is now fully committed to working in his father’s business (which may well have been the father’s plan all along)!

This sad but true story is one that is too often repeated among traders, even experienced ones. I’ve even seen a version of it in my own trading over the years. Contained in this article are the three most common causes of all trading failure:

  1. Failure to follow a systematic entry-to-exit trading program
  2. Failure to use reasonable position sizing
  3. Failure to account for market risk

The demons lying behind these causes are legion. They include adrenaline addiction, fear of success, a “poverty” mindset (a condition of believing one “deserves” financial failure which is most often caused by deep-rooted shame), lack of self-discipline, stubbornness, and sheer rebellion against any form of authority (as represented by the trading system or coach). While exorcising such things is a complex and often lengthy process, their effects – at least in terms of trading – can largely be mitigated by following a clearly laid out trading system with a proven track-record.

Systematic trading (as opposed to discretionary or “seat-of-the-pants” trading) neutralizes the three causes of trading failure: it offers a series of entry-to-exit trading rules that can be followed mechanically; it determines in purely objective fashion how to size every position, and with continuous long/short exposure, market risk is not only accounted for, it is also harnessed for profit. Trading a well researched, real-money tested long/short system (or systems) can help many traders get past their stuck places of mediocrity and failure to find at least a modest measure of trading success. And for some who really take to it, it can be a very powerful and reliable generator of wealth.