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Failure patterns…of a trader

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Failure Patterns of a trader
Failure Patterns of a trader

I was reading some trading articles, at the same time, review my past performance. What I am trying to do is identifying some fatal patterns that caused my losses, the failure patterns of a trader. Why?

I am not referring to chart patterns, but the patterns of traders’ behaviors. When I first started trading, I was told to observe the behavior of winning traders, and learn from them. I can’t agree more with this idea.

That’s why I would encourage new traders to start reading books like Market Wizards: Interviews with Top Traders and The New Market Wizards: Conversations with America’s Top Traders (A Marketplace Book).

It is important that you want to learn what winning traders do. However, I think it is important to observe the behaviors that cause the majority to fail. Here are some patterns that I have observed from myself and some traders that I know. Of course, there are still a lot of them, I am listing 4 failure patterns that I have experienced.

4 Failure Patterns of a trader

Laziness

We like shortcuts. Instead of working on studying the markets, understand the mechanisms of trading, we focus on looking for answers.

We want something that can give us a signal to “buy” a “good stock” and waiting to collect profit as soon as possible. We do not accept the fact that it takes a great deal of effort and time to have a feel of the market we are trading, such as observing the changes of volatility, reversal patterns, to test our strategies, and to prepare our own trading plan, etc. But, “good news” is, most traders will realize this problem when have enough losing trades, and get really beaten by the market. In trading, the lesson is always learned when confidence and money are no longer with us.

Lack of focus

We know and believe there are opportunities to make good money from trading.

We jump from stocks to futures and then options or even spot forex. Wow! Isn’t it cool? And , I guess you know, I have met more failed “multi-markets” players than others. All right, I was one of them (Other than Options, I have traded stocks, futures, warrant, CFD, and spot forex).

I am not saying it is not possible to play different markets or instruments concurrently, but, that’s not for everybody. There is a lot more to learn from one instrument, for example, futures trading.

I see stocks trading and futures trading are like playing tennis and table tennis (Ping-Pong, if you are from Asia). The rules are similar, the ways of playing are also similar, but the strength, the speed, and, the playground are totally different. Don’t expect a table tennis player to do well in tennis without much training.

Even though you have finally chosen futures trading as your play ground, stop jumping around from mini-sized Dow to Soy Bean then E-mini S&P then Euro futures and finally Pork belly.

Yes, I know there are traders trading a basket of futures, but, maybe that’s not for you, yet.

Focus on E-mini S&P, for example. How well is your system/strategy on this market? Is the tic size and volatility too big for you? Think. If not, go lose some money, then you understand what I am trying to say. If I can’t be consistently profitable in one market, do I expect to do well in trading basket futures at the same time?

Overconfident

First of all, I know traders experienced a lack of confidence as well, but I see more traders overestimate themselves.

I had a winning streak of being profitable every trading day for around a month when I started trading futures. Man, I thought I should be included in The New Newmarket wizard! LOL.

I did not know about the trading plan, risk management, etc. I just simply jumped into the market, and get a couple of hundreds home every day. I was just lucky. Until I faced consecutive weeks of drawdown or staying flat, I know, I need to start from scratch work on planning, testing, etc..

Overconfidence will cause lack of confidence once you are beaten.

Taking losses blindly

I am always puzzled when people tell me it is ok to lose money in the market.

Yes, we have the accept the fact that every trader will have losses even drawdown during the life of trading. But do you really learn from your losses? or just simply think that losses are part and parcel of trading?

You dumb. Losses are NOT ok if it is not part of your trading plan. You do not have a plan to execute, then how can a loss become part of your trading?

“I take loss because my setup failed to perform or the chart pattern I was looking failed to continue forming.”

“I take loss because I have receive margin call from my broker or I finally “can not take it” anymore.”

See the difference?

Seriously, losses are definitely NOT ok. Think, why did you lose? Stop telling yourself to accept losses blindly. There must be a reason you give away your money.

The moment I start observing failure patterns of trader, that’s the moment I identify my own problem and try to solve it.

Just another piece of random rant from Gav.

If you are interested in learning more about trading, make sure to check out my Back to Basics of Trading series.

About programming and trading

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About Programming and trading
About Programming and Trading

Don’t get me wrong, I am not selling any trading system here. Before I go into the main point, I am thinking of sharing some of my new findings of Tradestation.

I spent most of the past weekend reading some books in my trading library and playing with EasyLanguage programming on Tradestation.

I was preparing the program for backtesting, and to my surprise, I was in fact, automating my dummy trading system.

With the help of some functions in Tradestation, I am able to fire basket orders for execution automatically. Well, good findings, but, now it is not the time for me to utilize it. Anyway, It is useful to Asian traders like me, who trades in the middle of the night. I can always replace the order function with Alert, just to wake me up when an opportunity appears.

Some thoughts from programming.

As you might know, to code a piece of software, you need to have a defined program flow, logic, specific declarations, input, and return values, etc. (I know some readers like ZBS, Eyal, and Richard are far better than me when it comes to these IT stuffs, so please correct me if I sound funny).

You can’t have something which is ambiguous. You gotta tell the program what it should do. I have no problem with coding, but I was stopped a couple of times when programming my trading system. I have realized that I have been making too many assumptions and judgments when I was making dummy trades.

For example, “we want the price pull back to the area near 20-EMA”. Fine. How “near” is considered near? 1 tick, 2 ticks or 5 ticks away from 20-EMA? Another example, “We want to enter the trade above a narrow range bar”. Excellent idea. But how “narrow” is considered as narrow? One more example, “When the price is trending up, I would go long” , Cool.

Hey, What do you mean by trend up?

Dave commented on my system before as “I see there is a lot of “play” in the system, In other words, there are a lot of guidelines, there are very few real rules.” I fully understand his point when I started programming.

Here are some suggestion to evaluate if you really have a set of real trading rules for your system. You don’t have to do the boring coding. Instead, I would suggest trying to write out Pseudocode of your system. For example, a simple moving average crossover system should look like something like this

If 5-EMA crosses above 20-EMA then
  if High-Low <=1.5 points and (low-20-EMA)<=2 ticks then 
    Buy next at high +1 Tick. 
    Stop loss at low - 1 Tick 
  end
end

(The code above is for illustration purpose, you will go burst trading that)

Nothing so technical, but it is one of the ways to think through and stop cheating yourself by thinking you do have rules.

Guidelines are just not enough.

I have found it to be inefficient when I need to make too much judgment and guessing during the trading sessions.

I am not suggesting to have any magic values for narrow range candle or distance from EMA, but you need to be specific in defining your system.

Just a quick note to share something which I find to be useful, nothing fancy. I am still working on backtesting.

If you are interested in learning more about trading, make sure to check out my Back to Basics of Trading series.

25 rules of trading discipline by Douglas E. Zalesky

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25 rules of trading discipline

I read an article by Douglas E. Zalesky in SFO magazine back in 2006. It is a great list of rules traders should read.

Here I am listing out 25 rules of trading discipline discussed in his article. I think it is good to spend a couple of minutes every day to go through the list before start trading.

25 Rules of Trading Discipline

  1. The market pays you to be disciplined.
  2. Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.
  3. Always lower your trade size when you’re trading poorly.
  4. Never turn a winner into a loser.
  5. Your biggest loser can?t exceed your biggest winner.
  6. Develop a methodology and stick with it. don’t change methodologies from day to day.
  7. Be yourself. Don’t try to be someone else.
  8. You always want to be able to come back and play the next day. Once you reach the daily downside limit, you must turn your PC off and call it a day. You can always come back tomorrow.
  9. Earn the right to trade bigger. Remember: if you are trading poorly with two lots you must lower your trade size down to one lot.
  10. Get out of your losers.
  11. The first loss is the best loss.
  12. Don’t hope and pray. If you do, you will lose.
  13. don’t worry about news. it?s history.
  14. Don’t speculate. if you do, you will lose.
  15. Love to lose money. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly.
  16. If your trade is not going anywhere in a given timeframe, it?s time to exit.
  17. Never take a big loss. Only a big loss can hurt you. Please review rules #5, #8, #10, #11 and #15. If you follow any one of these rules you will never violate rule #17.
  18. make a little bit every day. dig your ditches. don’t fill them in.
  19. Hit singles, not home runs.
  20. consistency builds confidence and control.
  21. Learn to sweat out (scale-out) your winners.
  22. Make the same type of trades over and over again? be a bricklayer.
  23. don’t over-analyze. don’t procrastinate. don’t hesitate. if you do, you will lose.
  24. all traders are created equal in the eyes of the market.
  25. It’s the market itself that wields the ultimate scale of justice.

Full article in SFO [PDF] : The 25-Point Mantra: Discipline for Day Trading

This blog post is also part of my Back to Basics of Trading Series, feel free to check it out.