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The Market Owes You Nothing
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The Market Owes You Nothing

by The MoleMarch 7, 2014

Yesterday Tim Knight over at the Slope wrote a candid post marking the fifth anniversary of the ongoing bull market. Actually to be more precise he not so surprisingly called it ‘this insane, interminable, agonizing bull market‘. Now given my reputation for dishing out generous servings of tough love you may expect me to post a scathing retort criticizing him for clinging to his bearish stance all through what I believe will be remembered as the most significant bull market in our lifetime. Well, yes and no.

Yes, because just looking at the chart above drives home the lesson that directional bias can be extremely lethal to both investors and traders. And no, because after having run an active trading blog for five and half years and counting I have had the benefit of holding a permanent ring side seat to the trials and tribulations of the average retail trader. So instead let’s talk about some of the lessons learned and how my approach and personality has evolved over the past half decade.

Let’s go back to the inception of Evil Speculator. Some of you may remember that I used to be pretty active on the Slope. Back then Tim and I were conversing quite regularly and we even met once down in Orange County near Disney Land. Our charts were pretty much in sync starting in early 2008 – they all pointed down, way down! Back then we both also shared a keen interest in Elliott Wave theory and not surprisingly our own work was influenced by a certain Robert P., who I am sure you are all familiar with (for better or for worse). Now being bearish back in 2007 or 2008 was not exactly a popular stance – sure, those were different times when the bulls had to actually drive prices higher on their own without the helping hand (or should I say helping printing presses) of the Federal Reserve.

I also used to post a lot on a site called OptionAddict run by a really sharp fellow called Jeff Kohler. Very talented and technically excellent – a bit street smart as well – you know the type. Back then his site was at least as busy as the Slope – things were hopping and everyone was banking coin. Now here shows up this guy called Mole, who nobody had ever heard of before really, and he starts to post these super bearish charts! SPX at 800 or below – etc. – equities are going to fall off the cliff – not unlike what Tim was saying back in those days. You know the theme.

And after a few weeks of me doing that I actually started to ruffle quite a lot of feathers over there at OptionAddict. Up to the point where some of his readers and clients started to complain and wanted me gone. So Jeff wrote me an email and to be honest he was actually very cool about it. He actually wound up offering me a special section in his site where I could post all those insanely bearish charts. As you can imagine I was a bit surprised about that but I laughed it off and just told him thanks but no thanks. Instead I spent a weekend slinging some WordPress PHP code and the following Monday I announced my own blog, and that was the inception of evilspeculator.com, sometime in early August 2008.

When I started out I never envisioned it to be a long term commitment. Actually I simply wanted my work to be seen by people and for me personally it also served as my trading log. Which as you all know is a key component in becoming a successful trader. It keeps you honest and it allows you to re-visit your old campaigns and hopefully learn from them. As luck would have it however (and for some mysterious reason) Tim Knight really loved my new blog and by talking about my work he sent a ton of traffic my way. So here I was getting a ton of hits just a month or two after having started my new site. I was very lucky to say the least and I thank Tim for his support to this day.

It goes without saying that we had a lot of fun in 2008 – I was posting my bearish charts and my audience grew by leaps and bounds. The tape certainly was going by the script but I must confess that I was horribly naive about it all. As I’ve mused before – it’s one thing to prepare for a bear market – it’s another to trade through it and come out in one piece. One infamous day that will remain burned in my memory for the rest of my life is that of September 17th, 2008. I was shorter than a pygmy in a limbo contest and out of the blue Chris Cox over at the so ever helpful SEC announced out of the blue to temporarily ban the practice of naked short selling. My wife came running into my office as I was sweating bullets and cursing like an angry sailor whilst trying to close out my long list of short positions during a relentless short squeeze. Let’s just say that I lost over 50% of my account that day.

That was just one out of many occasions when I was forced the embrace and adjust to brutal reality of trading a bear market. Some of you may still be looking forward to one but be careful what you wish for, you may just get it. Fact is that 90% of market participants are against you and much more importantly – so is your own government. That was another miscalculation I am sure many of us are guilty of – we completely underestimated the power and resourcefulness of the White House, Congress, the SEC, and especially that of the Federal Reserve. For all of them are being judged by the health of the economy (rightly so or not) and they will do whatever it takes to preserve the status quo.

The Bottom

March 6th 2009 passed like any other day for me – I was getting a bit nervous about any remaining downside potential but I was still sitting on a generous amounts of puts. The days and weeks that followed slowly relieved me of any remaining short positions as the tape started to continue higher. This didn’t affect the traffic on my blog very much – as a matter of fact all we welcomed the ongoing rally as an opportunity to short equities again from higher up. How foolish and how arrogant in retrospect. Any retracement that followed was relatively shallow up until April 2010 when equities started to descend lower again. Of course we were all convinced that this was the onset of the next wave down – P3 if you will (I was still wave wanking then). Tim wrote me and we were both very excited about the expected repeat of 2008.

Of course that didn’t happen. What did happen was that the SPX 1000 remained intact and just kept clawing its way higher. Week by week and then month by month – which eventually turned into years. All the way through that the main question on our mind was when the next phase of the bear market would transpire. We were getting rather antsy.

An Ephiphany

By late 2010 I was pretty disgusted with it all and then one day I suddenly had a bit of an epiphany. I’m not sure where exactly it came from but within a week’s time I completely changed direction on my blog as I increasingly began to entertain the notion of this being more than just a mere correction within a bear market. I realized that counting waves was not only not helping me but instead had served to impair my trading. I actually had done much better before when instead of predicting market direction I was simply looking for entry opportunities. Why not simply go back to the type of technical analysis that allowed me to balance both bullish and bearish views? And bank coin in the process?

So I reverted back to more basic technical analysis and completely cut ties with Elliott Wave International. And strangely enough I started to experience the inverse of what had happened back on Kohler’s blog – people got upset about about my now more bullish and especially my ambivalent charts. What happened to P3 Mole? Why are you suddenly becoming more bullish? As a matter of fact I started to lose a bit of traffic. This was in some part based on my new approach to things but also due to me having little tolerance for what I perceived nonsense or mental masturbation in the comment section. I wanted to shift things to a more productive level – exchange charts, analysis and solely focus on banking coin. What I didn’t want was to run a social club where people just hung around to chat and talk about their pets and respective hobbies. I knew I would surely lose traffic that way but I frankly didn’t care. So I changed. Some people didn’t enjoy the new Mole and left for more greener (and perhaps more bearish) pastures. My trading and my bottom line however improved significantly.

Lessons Learned

1.You are your own worst enemy.

The most important lesson I learned was that you need to be in touch with yourself and be realistic about your pain threshold as well as your personal abilities. But more importantly, recognize that it is you who is the problem. As the saying goes, we have met the enemy and it is us! Not the market, not Bernanke or Yellen, not anyone on the outside. If you expect certain things to happen and then they don’t it’s no use to get upset or resort to sardonic remarks to make yourself feel better about your own losses. Just mosey over to ZeroHedge for a great example of highly intelligent folks who continue to have their butts handed to them in the market. Do you really want this to be you?

2. There is no justice.

Yes, I know that’s a rather tall order to swallow. See my musings above about the government and how it will fight the bears every step on the way. I am not going to waste your time regurgitating the state of the country, our economy, our financial system, our society as whole. How the books were cooked, how the money printing continues to this day, how banks basically got off the hook free and clear. And not only that – they were rewarded instead and continue to profit handsomely from gaming the entire financial system. Tim and others have been rather prolific in belaboring that fact but despite the fact that the lower 95% of the population asked for justice you can count the people who were actually punished (kind of) on one hand. That should tell you all you need to know about justice in the financial system.

3. You cannot affect things outside of your control

This one ties into the prior point – getting upset about things or events outside your immediately control only serves to instill unneeded stress and frustrations. Both of which lead to the express elevator to the woodshed. Once I stopped caring about the inside dealings and games rampant in the financial markets I suddenly was able to think a lot more clearly. Trading is difficult enough – there’s no reason to get emotionally involved. I know, easier said than done. But it’s possible and without becoming a complete cynic – quite on the contrary. You can still care outside of trading but once you walk into your office all that matters is your next trade.

4. Maintain a strict information diet.

But I didn’t stop there. In the past few years I have greatly reduced the amount of information I ingest on a daily basis. In 2012 I actually wrote a post on the subject and I hope you will find it interesting. To make a long story short, when it comes to information more is not necessarily better. Actually on the contrary – the more information you ingest the more difficult it will be for you to maintain an objective stance. At this point I don’t care if I’m trading crude, the E-Mini, wheat, or the EUR/USD. It’s all just a symbol to me and I simply follow what my charts are telling me. And of course I always fade the paper.

5. Relinquish any outcome bias.

In the past few years I have completely detached myself from what is commonly referred to as outcome bias. That actually has deeper implications. Not only don’t I care about where the market swings – up or down – it’s all the same to me. I do not believe that bear markets are any more ‘socially just’ than bull markets. Yes, I am aware that it’s all built with smog and mirrors but according to rule #3 there’s nothing I can do about any of that. On a more hands-on level I also do my best to not care whether or not a trade is successful. Yes, you heard that right – as long as it was a ‘good trade’ I am happy. Why? Because I have spent a lot of time creating various systems with a demonstrable long term edge. If I follow my own rules and remain disciplined it will result in profits. Which brings me to my next point:

6. Have a system!

That of course deserves an entire post itself and I’ll have to limit myself to a few general thoughts on this. If you trade without a system you will be trading the one that has being issued to you at birth: LOSING! I don’t want to over dramatize this but trading without entry rules, campaign management rules, stop loss rules, capital commitment guidelines, etc. will sooner or later result in you getting wiped out. Trading is a tough game and it requires clear rules that tell you when you are wrong and when you should be taking profits. They can be very complicated or as easy as a moving average crossing system. It doesn’t matter as long as they clearly promise an edge over time.

Now you have two options – 1. you can develop one yourself – or 2. you can buy or steal one. In either case – make sure you first sit down and write down your beliefs and your personal requirements. Why? Because we all are special snowflakes and as such we have a different threshold for pain and greed. Also, you may enjoy trading certain symbols, certain markets, or certain timeframes. Trend trading for instance works for some people and it clearly has an edge but most people do not have the mental fortitude to actually follow trending systems. It doesn’t matter if a system has a good edge if you are unable to follow it. I have written about this quite exhaustively on my blog and will probably do so again. Don’t think that system trading will solve all of your problems. You just exchanged one bag of problems for another one. You will have to learn to follow your own system, no matter what – otherwise you will probably wind up losing more than by simply following your whims.

7. Predicting prices has little to do with successful trading.

I already mentioned that I gave up on Elliott Wave International a few years back but that was only the tip of the iceberg. I realized that I needed to be very cautious about being influenced by others around me. That may include other bloggers, fellow traders, the news, the daily rumors, my own family, etc. There is no problem with embracing good trading principles and with consuming charts that objectively give you the opportunity of getting positioned. But when I see someone offering predictions I usually run the other way. Fact is – nobody really knows what lies ahead.

Most traders analyze the market in order to predict prices. But predicting prices has little to do with successful trading. What is important is determining when the risk is overwhelmingly in your favor and then controlling that risk. If you simply produce charts to predict markets you are simply engaging in an academic exercise without real world consequences (i.e. profits or losses).

8. The market does not owe you anything!

Most importantly – realize that nobody owes you anything. If you decide to trade the markets then you need to embrace everything that comes with it – the good and the bad. Don’t try to turn this into a personal vendetta or try to prove to yourself or others that you were right all along. We are all in this to make money and as such that is all you should care about. The only thing that matters is the size of your account – and hopefully you will be able to see it grow week after week, month after month, year after year. That should be your core mission – nothing else matters. Don’t get distracted, don’t take it personal, and don’t blame anyone but yourself.

Summary

Since I have started to incorporate these rules into my trading life I not only have become more successful and profitable, I also have become a much happier human being. I’m still an edgy and mostly evil Mole of course but in general I wake up with a smile each morning and look forward to my work – both the blogging and trading end. I don’t stress over open trades anymore and I sure as hell don’t lose any sleep over them. And that’s a much better way to live your life, wouldn’t you agree?

Enjoy your weekend!

 


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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  • http://thebhbgroup.com TheBHBgroup

    Best post ever! Thx for all you do!

  • buysidetrader

    great post Mole. one of your best

  • http://www.slopeofhope.com Tim Knight

    Pure gold, Mole! Hats off to you for your flexibility, willingness to learn, and openness to change. It’s been a pretty amazing period of history……..and although I feel Prechter will eventually be right, I’ve also come to realize the celebration will probably be held on Martian Colony Gamma-Five. Thanks for a great post.

  • SilverEagle

    Agreed. Great post. Lot of take in here.

  • newbfxtrader

    Good one Mole. Lots of wisdom here for the newbies. Free to learn lest it becomes expensive as you blow your accounts.

  • Southern

    Pure Awesomeness Mole! I don’t post here ever since I became a leech in 2010 (I don’t really trade anymore), but I do still keep up with your post and they have been the most non-biased, spot on that I have read. Well done sir!

  • teslaman

    Excellent post Mole! Probably one of the best… if not the BEST!!!

  • http://dartht.blogspot.com/ Gold_Gerb

    this one is for the archives. *click*

  • itcomesupinwaves

    Good post Mole. Interesting no one mentioned that move in the USD/CAD.

  • jmoney3000

    Great post!

  • http://ibergamot.blogspot.com/ i Bergamot

    Fantastic post, mate!
    Not only trading wisdom, but also a literary gem!
    Just read it, while nodding my head
    Read twice the part about following own rules – exactly the problem I had this week…he-he

    If anything can be added at all (humbly, if I may) – trading should be effortless and natural, like breathing
    inhale – exhale
    buy – sell

    Your point #1 is all over my face. I was trying too hard, trying to speed things along – entering just a bit too early, exiting just a bit too late – turned a perfectly fine system into a mess… until next week
    All The Best!

  • datul

    Superb post. I m going to print it and frame it on my wall. True wisdom. Thank you mole

  • http://dartht.blogspot.com/ Gold_Gerb

    I thought I recognized the poodle.
    5 years back. geeeeez.
    😉

  • http://sentimentupdates.blogspot.com/ Sentiment Updates

    I am a reformed bear. It took me longer than some. I made good money in 2009 when I started to trade actively only because I made a killing in the first quarter decline on bearish bets and did not manage to lose it all by the end of the year. Taking the occasional long bet helped.

    In retrospect, that early success was probably a bad thing because it biased me towards winning on the bear side. Then, things went haywire in 2010 to 2012 and I lost about 50% of my account, mostly on bearish bets.

    I turned bullish in late 2012 when I finally arrived on a set of highly accurate long term indicators for the market, and that has served me well. I’m pleased to say I am nearly back to break even since I started actively trading. I hope like any small business, the early losses were just the losses a business takes while ramping up, and future profits are ahead.

    I strive to be only as bullish or bearish as my indicators tell me to be. Right now, I’m seeing some early warnings, and any action I have taken to hedge my vastly long stock positions have already failed, but such as it is (which is why hedging might not be useful with the VIX consistently below 20).

    Anyway, one interesting observation. 2010 is nearly identical to 2014 to date. I think there will be hell to pay for this wave up. Sentiment is finally perking up after years of being buried. We may have to wait for the summer, which is always a risky time to be long. Let’s see how long this plays out. I have already taken up hedges, so I’m kind of hoping it doesn’t work this way, since that would make me way too early.

  • https://evilspeculator.com molecool

    Thanks for all the kind words folks – I just came home after a boy’s night out. Was happy to see that the post was well received – I actually wrote it in a rush and didn’t have much time to polish it.

  • https://evilspeculator.com molecool

    A rare visit – I wish you would drop by more often. But I know you have your own herd of cats to take care of 😉

  • https://evilspeculator.com molecool

    Ah – haven’t seen you around for a long time. How goes it?

  • DollarChaser

    fantastic post mole, thanks! i feel like i have gained a few years trading experience just reading that. copy pasting this one to my ES archives. cheers!

  • https://twitter.com/#!/fresbee2010 fresbee

    I see a picture of myself in that post. Its so imp to eliminate the directional bias. Even today despite clear Long setups, am unable to long markets at 1850 or 1860 or whatever the level because am kind of forced to say “This is crazily high. No way going long.My setups are all wrong…. ” . Direction bias need to be the first thing to be eliminated before you become a trader of any quality.

  • MonkeyBusiness

    Awesome post Mole, thanks for all you do.

    https://www.youtube.com/watch?v=CF7OnW4XDck

  • mugabe

    This is a very good post. I am at the same point you are in my trading. I don’t use the same system as you, but that is not at all important. The main point is that you can’t predict the market, you can only react to it.
    I would also say that the most important part of success is not the entry system you use but the exit system you use. ie what are your rules for cutting losses short (the easy part imo); what are your rules for letting profits run (the difficult part).
    The other key part is whether you diversity asset classes sufficiently to find markets where your particular system will work at any given time.
    ‘The value in professional trend following strategies come from the diversification. Making the rules more complex does
    not aid your performance. The most common amateur mistake is to spend all the time tweaking entry and exit rules and not enough analyzing position sizing and investment universe.
    http://www.followingthetrend.com/the-trading-system/trading-system-rules/

  • mugabe

    At the risk of labouring one of the points in my previous post, you know that you’re on the wrong track when you say ‘I think that X/Y/Z will happen.’ The plain fact of the matter is you haven’t got a clue what will happen. If you have to make predictions, these are the best kind:
    http://www.ritholtz.com/blog/2013/12/my-annual-predictions-for-the-coming-year-2014-edition/

  • https://evilspeculator.com molecool

    Those are the types of predictions I am happy to implement into my trading.

  • Sean

    Nice work! It’s hard to find this type of clear thinking out there.

    As for those perma-bears out there, I think I will muse on this subject a little with my coffee this fine Saturday morning… I think being a bear is simply evolutionary biology at work… as a species, we have evolved an instinct to anticipate and avoid negative outcomes that is much stronger than our instinct to seek positive ones (avoiding a spider bite is much more important to survival than eating food on any given day, which is why most human babies are born afraid of spiders without ever having seen one), so it makes sense that the vast majority of people getting into this trade would immediately be biased towards the bear side as they constantly think about the next negative outcome, which is greatly reinforced when they find and participate in a community of like-minded bears (thanks our evolution as social animals sprinkled with a little confirmation bias, which also explains why they get offended/angry at opposing views, you are attacking their identity and community). Regular market action also helps to reinforce the bear-state as frequent 1%-2% corrections regularly trigger a reward mechanism (the reward mechanism is likely dopamine, which is the “about to payoff” neurotransmitter, so it is more accurately a desire to continue than a reward per se***) and knowledge of 30%+ drops in the past keeps the bear moving forward since they know their big payoff is just around the corner, this slowly drains them without bankrupting them all at once (the market as a parasite? Does it crash when a critical mass of the bears have been sucked dry?). And then you throw a prefrontal cortex on top of all of this which is comparatively unevolved and has more power than we know how to handle, and you have a very convincing monkey puppet with our lizard brains pulling the strings. The bright side is that we can change this if we want to, but it means letting go of identities and biases vis a vis the market. Unfortunately many (most) people are unable to do this, as they hold on to their “reasons” that all sound very convincing. Now dance monkey!

    “So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for anything one has a mind to do” -Benjamin Franklin

    ***There is a famous experiment where researchers gave rats the choice to push one button to receive food and another to stimulate the same region of the brain that dopamine affects. They found that mice would push the stimulate button until they died of starvation. For a long time they thought the mice were ‘orgasming’ themselves to death (why not, wouldn’t you?), but then they applied the process to people. Some people’s neuroreceptors for dopamine do not funciton, they literally want nothing …since nothing in life offers the prospect of “paying-off” why do anything? So they tried this stimulation process with these people and found the same thing, they manically pushed the button, only this time doctors could ask them what they felt… they expected to hear that they were giving themselves orgasms, but what they found was that the patients were giving themselves “about to orgasms” and they were convinced that the next press would be “it”… actually, the patients weren’t sure “it” was an orgasm, they just knew it was some kind of payoff that was just around the corner.

  • https://evilspeculator.com molecool

    “which also explains why they get offended/angry at opposing views, you are attacking their identity and community”

    Yes, and that’s straight out of NLP. Instead of arguing with a bear about a big crash NOT happen it’s easier to convince him/her that it may take a lot more time UNTIL it happens. This way you don’t negate their existing cognitive bias. Of course you also don’t really help them and as you may suspect I’m a big fan of satori – meaning shocking people’s POV. There a some people on which it works well and there are others who simply get upset and completely lock up. The reason why I don’t really employ both strategies here is that in my experience the people receptive to this ‘shock treatment’ seem to make good traders, the latter not so much. You can teach them quite a bit but the ugly truth is that 90% of people are mentally and emotionally unfit for the trading game.

  • https://evilspeculator.com molecool

    “Does it crash when a critical mass of the bears have been sucked dry?”

    Of course – bears don’t lead to crashes – it’s a LACK of bears.

  • Sean

    Yeah, it’s exhausting trying to dance around people’s emotions on issues that should be based purely on data, which is why I try to reserve that effort for a select few (or when I must)… that’s probably why I enjoy working with engineers so much, it’s not about beliefs, it’s about what the data say… also, and you can probably relate to this, but it seems that a lot of Germans have this quality as well. At my last job I got to work with about a dozen German engineers with PhD’s that my company had recently brought over through an acquisition. The lack of b.s. was glorious…. unfortunately the corporate culture was deeply rooted in the idea of not rocking the boat and never showing bad news (to the point that data was either not presented or even “adjusted” to show a better picture), so many of them left or were pushed out and the few that stayed learned to keep quite, which was also a big reason I was so happy to leave this past year.

  • Grant Goodrick

    well done , great piece of advice

  • aiki

    An outstanding post Mole – and it goes far beyond trading. Thanks for all your efforts, your clarity of mind and your wiliness to share them. Great stuff!

  • phylum

    Extract from Ivan Krastins’ web site ProfitfromPatterns.com ……

    “The following points are based on a very broad survey that was done in the early 1990’s of literally hundreds of futures brokers who were exposed to thousands of traders. The brief was to establish what, in general terms, led to the demise of most of their clients. Putting it another way, what are the positive ‘guidelines’ that could assist you in attaining your goal to become a successful trader. Whilst there were many more than just the points below in the original survey, I have deleted many that doubled up on the same idea.

    I need to stress that these cannot be considered to be ‘rules’, as each individual has different circumstances, objectives, and personalities, not to mention risk capital. A mature aged trader would have very different goals to those of someone single in their late teens or a family person in their thirties supporting a young family. Additionally, please bear in mind that the survey was conducted before the current advent of keyboard (electronic) trading from home that has mushroomed in the last five years. Nevertheless, the points are still pertinent today.

    If you have been trading for a while, I am confident that you will recognise yourself in some of the points. If you are new to trading, this is your opportunity to learn from others, and perhaps save yourself the pain of making the same mistakes as others have before you.

    Without doubt, the major factor that causes traders to ‘fail’ is not having a trading plan, let alone a detailed back-tested trading plan.

    Another common factor amongst traders is their inability, emotionally, to allow their winning positions to continue, or to take losses quickly. Often fear of losing a profit leads to winning position being exited prematurely. Hoping that a losing position will turn around stops traders from accepting the small loss before it becomes a larger loss.

    Lack of discipline in sticking to their plan is also a shortcoming of many traders. When a position has been established, it is often the wrong time to address how that position will be managed, as the emotions of fear and greed often come into play.

    Trading on news announcements often leads traders to buy at a top or sell at a market bottom. This stems from the mistaken belief that markets react to the news in the popular press, and not recognising that, in many cases, the news has already been discounted by the market.

    A string of winning trades, especially early in one’s trading history, can also be a negative. This is especially true if the trader becomes overly confident, increases their position size and starts to believe that the next trade must be a winner too. It is all too easy to give back profits in the markets.

    One of the biggest downfalls of many traders is taking a position that is too large for their account size. This refers to the margins required in the case of futures, or using too much of their capital on a stock or option position.

    A natural trap for inexperienced traders with a small trading account is to want to increase it quickly by day-trading. This usually means trading for very small profits, but trading very often. The cost of doing business and slippage begin to play a larger role in the overall profitability factor.

    Lack of trade management is an area that often contributes to traders not succeeding. This includes things such as not defining (and sticking to) a predetermined amount of loss, adding to a losing position (also known as averaging) and not using stop losses.

    Having a trading bias (bullish or bearish) means that a number of valid trading opportunities are overlooked. After all, in most of the markets today, you can make money out of rises or falls in the price.

    Believing that the current trade is more important than the last one, or the next one, often leads traders to react emotionally to market movements – either in their favour or against. The concept of needing this trade to be a winning trade often means that it is hard for a trader to admit that they should exit the market, with a small loss or even with a small profit.

    The inability of a trader being able to accept a small loss and to exit the market often leads to a much larger loss. This loss may be either financial or emotional, or both. Lack of discipline is a real stumbling block for many traders.

    Once a position has been taken, many traders ignore new messages or signals from that market. Often this leads to a profitable trade turning into a losing trade, or a small loss turning into a much larger financial loss.

    Trading emotionally, or on a whim or gut feel, in the longer term is a recipe for disaster. Even allowing emotions to enter one’s decision-making process makes it far more difficult to follow a trading plan.

    Placing stop losses too close to current prices can mean that what is potentially a winning position turns into a loss needlessly. This is especially true if a financial stop loss is used when the entry has been based on technical analysis techniques.

    Starting with too small a trading account is a major cause of many traders not making the grade. This means that a trader has to decide which position is taken and which is ignored because of a lack of funds to take all the trades on offer.

    Trading more markets than a trader can handle simultaneously, either time-wise, account size-wise or risk-wise means that something has to suffer. It is usually the trader and their account that suffers.

    Being involved in thin or inactive markets is very dangerous. Whilst a position can be established, getting out can present a major problem. This is especially true when a position is moving against the trader rapidly, and the trader has to exit.

    A risk that is too large in proportion to a trading account means that only a few losing trades in a row may lead the account to dwindle to the extent where another trade cannot be taken. This is another form of over-trading.

    Trading the markets for action or excitement are all signs of a lack of discipline by a trader. This can lead to small losses not being taken, or not enough work put into analysing the markets.

    Not recognising that markets trend, and trying to trade against it, especially without stops are major causes of many large losses. Insufficient funds or poor money management techniques add to this dilemma.

    Trading in markets that are seen to be very speculative and exhibit large movements from one trading session to the next is another frequent mistake. Whilst all markets have the propensity to do that (especially some of the US futures markets), some are more prone than others.

    Whilst confidence in a trader is important, too much confidence, or bravado, can lead to disaster. This is especially true when combined with an overabundant dose of ego and a conviction that the market has got it wrong and the trader is right. Even a large account cannot remedy this situation at times.

    Making trades on the basis of rumours or tips is not a sound way to succeed at trading. Doing a trade based on ‘insider’ tips or knowledge is not only illegal, it also often leads to losses.

    Markets have become very inter-connected, especially in today’s global, electronic age. Not keeping an eye on global trends can lead to trades being taken at the wrong time.

    Not believing the price action and stubbornly sticking to one’s beliefs as to what a market should be doing, leads many traders to stick with a position far too long.

    Trading just one market can lead to impatience by a trader and hence lose the discipline to wait and stalk that market for a planned trading opportunity.

    Inadequate homework/research/testing by traders means that they really are ill-prepared to take on the challenge of trading the markets.

    Not spending the time to analyse one’s own emotional and psychological makeup leads to a trader not knowing themselves and hence not being aware of the type of market and trading approach that suits them best.”

  • Scott Phillips

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  • SilverEagle

    Mind sharing what those longer-term indicators point to?

  • momac

    great post Mole, interesting to hear how evil speculator all came about.