Be Your Own Coach
Moving on to part 2 of 3 in the series of "Trading Mistakes to Avoid" I soon realized that this could be an encyclopedia of mistakes that I have made over 10 years of trading. In fact, it's inspired me to write a small book (which I will share with this community when done).
Trading can be a total shit fest mentally but pruning the weeds from your mental garden is a good place to start in pursuing a quiet and stable mind in which to be successful where most fail - and trust me, many fail, failure is the price we pay in trading to find good trends.
This brings me to these next points on having a plan and in that plan making sure you take care of yourself. Remember, you are your own best friend or worst enemy, how you deal with setbacks and success in financial matters is on you and nobody else.
Grab a Couch
In this section I want to really focus on some psychological mishaps that all have the same theme: "Beating the shit out of yourself". It's always struck me in coaching sessions and in discussions with other traders just how much we all do the following:
- Become our own worst critic - in the process develop neurosis that manifest in things like not taking trades or taking dumbshit trades
- Buying too soon before the breakout or too late when extended
- Not knowing when to sell or not selling when we should
It really comes down to following rules, and when we don't follow the rules, it's time to find the why and rip that mother fucker out of your psyche. Habits will repeat themselves, without clear executable plans and objective and calm self-talk, failure is highly probable in trading stocks.
1. Being Your Own Worst Enemy or Critic
When Things Are Good
Trading stocks is emotionally draining at times, certainly when I started trading I used to swing between elation and despair. That feeling of walking on sunshine was amazing.
Everything in the world fell into place when the charts were green. Girls would be interested in me, my boss would tell me what a good job I am doing. Nothing could go wrong! If you feel this way right now, sell some stocks - before phase 2 ensues.
No coaching required, I am a fucking rock-star! Nobody can tell me shit!
Typically Followed By
The second however my account went red, I would begin trading like a maniac and cutting good trades, adding to really poor setups and doing everything in my power to lose money.
Instantly, like magic, my shoulders dropped, my blood pressure was up and the sound of a pin dropping in a town 500 miles away would set off a series of angry outbursts at my monitor, my wife and pretty much anyone "dumb" enough to be in "my" way.
The ego protecting itself to the detriment of anything in its path.
Typically Followed by Some Patterns
After these green to red runs in the market things got pretty dark, the patterns I would notice here specifically were:
- Totally abandoning trading and feeling like I wasn't good enough, personalizing mistakes
- Associating trading performance to other things in life - my gym performance would tank
- Feeling less confident in my relationships with women and less of a man around other men (yep really).
- General confidence in sports and going out in public
At the time, I really didn't understand what was happening. I would go from walking on sunshine being "Alpha Bro" to living in the gutter "Beta Cuck". It never dawned on me that I wasn't trading my strategy and was emotionally misaligned, I always assumed it was just my "bad luck". I had no idea how to coach myself and reflect on my results (hint, get a trading journal).
The Causes Create the Symptoms
If you start falling into these traps, it is highly likely that you:
- Are using too much money trading - if you lose you get wiped out, it doesn't matter when winning :)
- Putting on positions which are too big. this really makes it personal.
- Not having a clear place to buy and sell. So watching stocks run up but run down all in the blink of an eye.
It also is a sign that there may be other things in your psyche that aren't being addressed. Namely, if you don't have confidence overall and are forming dependency on trading for happiness, you very well may be developing a full on gambling habit.
If I had a Time Machine
If I could turn back time on my trading and go back to these parts of my life with what I know now. I would make sure to:
- Focus on other things outside of trading, moreso sports and the psychology of winning
- Trade a system that suited my style and I understood - this is a big one!
- Be much easier on myself and adopt a growth mindset vs a fixed mindset
Ingraining and adopting a learning and curious mentality towards the market is of utmost importance. Be an old dog that can be taught new tricks.
If you are trading right now and the above sounds too familiar, the absolute best recommendation I can give is to do a full trading review. I wrote up on this before but insist that you incorporate this into your regime.
Cut out things like social media to avoid comparing yourself to ridiculous standards.
Step back on the position size. If you are being hard on yourself and exploding around the place because "it's everyone else's fault" - reduce your risk, reassess your plan and reduce your size until things improve.
Trade to create long lasting wealth, not to impress other people - fuck other people, create your own success.
2. Buying too Soon and Selling too Late
Buying too Soon
If I had a dime for every time "I knew better"I would never need to trade. I hear far too often of people wanting to get in early or buy a stock based on fundamentals alone that the crowd will "eventually" discover.
That line in itself shows so many flawed approaches to trading that it pains me to write it down. The problem with trying to beat the crowd is that it just may happen. You beat them to a stock or setup that never happens - go you! You are now part of the churn of traders laying the foundation and support levels for other people to use as the support and resistance lines.
I look at it as I would on a date, meeting with a serious business partner or catching a flight. Imagine pitching up to a date 2 days early. Somehow, if that person found out, they may think you are a bit of a creep, the same could be said if you show up a week later.
Typically, buying too soon leads:
- Missing other trades you could take with better odds or setups
- Multiple stop outs because the price action was not lining up as it should have
- Gap downs become more common because you have emotionally invested in a stock and form a shitty belief about it
Buying Too Late
Yet another of the most painful and common mistakes I used to make was buying stocks because I went online and read story about this stock being "the one" - typically with an even worse off emotionally invested twat from Stocktwits or some other garbage online. Yes there are exceptions but very few.
Buying extended or too late in the cycle is even worse as it is hard to set a defined stop loss and you might buy just before it turns around. Cryptocurrency is the king of FOMO buying as some tokens can shoot up 100 or even 500% in a day... for multiple days. It is so hard to not FOMO into these trades when you start out.
Define and Categorize Setups
The struggle during this phase was I never had truly defined criteria I could use to qualify and rate a setup and it's probability of success. Buying became a real "hunch" or shoot from the hip affair. Unlike the wild west however, you can quickly run out of luck adopting this approach, on several occasions, I did. You can learn this the easy or the hard way, somehow, 95% of all "traders" prefer the latter.
There is indeed a right time to buy stocks - the time that your clearly defined strategy says you should. Distinct chart patterns and rules that determine when you get in and when you get out.
3. Not Knowing When to Get Out
Just like taking a train, if you stay on past your stop, there is a high probability if not a certainty that you will get off at the wrong part of town. I have had some absolute insane price runs in stocks and watched my account go up 100% and all the way back to break-even (and worse).
During the cannabis run-up I had massive paper profits tipping on six figures and remember the day it went parabolic, I added to the positions in some cases doubling or tripling them, just before my annual sales review... I went into my meeting with big dick energy and nailed the review, went back to my desk and my heart sank to my fucking feet.
The exhaustion gap had begun and the stocks I was leveraged up on started gapping down and gapping down hard. I literally thought it was a glitch on Interactive Brokers.
I had to refresh my screen as it was flashing -$45k daily PnL then -$67k but to my disgust it was the real deal. Months of work, screening and really good trading was getting smoked. I was getting the spit roasting of a lifetime.
It was at this very point I thought to myself -" hmmmm.... Didn't I say I would sell half of these if they went up 4 x my initial risk". Hindsight is a bitch, and looking at my trading diary, I had this labelled and plastered everywhere with "don't be greedy" literally written down on my trading diary.
Trading has a funny way of reflecting who you are at your best and worst. Just when I was getting some real success, my ego told me to go harder and dump my selling plan out the window - would not recommend.
When I trade now I have far more specific rules that keep me away from emotional and financial harm. I will share them with you as honestly as possible, there are a few nuances but this gives you an idea:
- If anything I own closes below the 50MA I have to sell it.
- If it breaks my stop loss then I have to close it - including gap downs
- After 3 lower lows, I will place by stop at the lowest pivot point of these lows and sell if it breaks that point - this has been surprisingly useful
Long story short. If I followed these simple rules 10 years ago, I would be very wealthy. Simplifying your plan allows you to coach yourself objectively so defining, testing and back testing these rules is a prerequisite before you implement them.
An Odd Combination
I know it's a little strange that I mixed buy and sell rules with the psychological aspects of trading.
This was intentional though. Far too many people I meet and talk with separate their strategy from their psychology and somehow think they will magically turn into amazing profitable traders. The reality of trading is far different.
If you don't have clearly defined buy rules and sell rules then how can you anticipate being "okay" with your strategy. You could have a 1000% profit which could drop to 0% or worse -100%.
The strategy itself needs to have the psychological pitfalls built into it inherently, more specifically, your own psychological pitfalls. This is why trading someone else system or not having a system at all leads to emotional burn-out and constant fear and anxiety in trading.
Having learned this the hard way, all I can say is, if you don't have a system that is defined and aligns with who you are, you a have three options:
- Change who you are (yes it's possible)
- Find a system that suits you and can be understood.
- Trade someone's system you don't understand but manage the stress and reduced sleep - been there, done that.
The main emphasis is that these things need to be considered before you trade. Take it from someone who has been there. Even though I know you will not heed the warnings, when the truth shows up (and it will). Come back to this blog and contemplate what you could do to become a better trader.
In my final part III of this series I will delve into some more psychological nuances and wrap it up. Feedback welcome, please spread the word and share our content - let's save each other from trading misery and make some gains!