Are You Making This Fatal (hidden) Trading Mistake?

There’s a certain type of thought that can lead to fatal trading mistakes. It’s not obvious, and it’s often disguised as something positive. But your mind is a master trickster. Its powers of self-deception are limitless. And it’ll sabotage you by rationalizing this trading mistake as a prudent risk measure.

So what is this hidden mistake? Let me give you an example. The market is flying higher and it breaks out above resistance. But price character is acting much weaker than it should be if this were a legitimate breakout. You’re also seeing divergences in a couple of the market internals and related markets. So you think this could be a good fade to the short side. You get your order ready.

But just before you hit the trade button you have a thought. “What if the market is only momentarily looking weak but it’s about to get strong? It is a breakout after all.” You hold off. You’ve been taught to be very prudent with risk management. You think that while this could be a great opportunity, you can wait for a lower risk trade. You’ve been taught to always think about risk first. No need to jump into this short that could be underwater if the market finds momentum on this breakout.

And sure enough the market suddenly finds some strength and takes off to the upside. Woohhh… great decision… that would have been a loss! But hold on. Could this type of thinking be a fatal trading mistake that you and most other traders are continually making?

Well, if you stopped to analyze things, you’d likely realize that about 70% of the time a weak breakout move like this fails and reverses. And if you have a 2.5 point stop and 10 points of potential reward, your reward to risk profile is 4 to 1. That means that if you take 30 of these trades over the course of a few months, you’ll make about 75 points [(70% x 30 x 4) – (30% x 30 x1)]. So even though you avoided a loss this time, you’ve just skipped a major positive expectancy trade. And the next time you skip it- which you will based on the incorrect positive reinforcement you got this time- you’ll miss a 10 point trade. And over the course of a few months, you’ll miss 75 points of profits. And this is what most traders are doing. And this is the difference between being a losing and profitable trader.

So how should you avoid this fatal trading mistake? First, realize the nature of your mind and its ability to rationalize and deceive. You’re not being prudent with your risk management by avoiding trades that could go against you. ANY trade can go against you. So catch yourself when you think like this. Second, learn to think in terms of a long series of trades. It’s not the results of this trade that matter. Think what the overall outcome of 30 or 100 of these trades would be and trade on that basis.

So here’s a practical strategy for overcoming this trading mistake. The next time you’re rationalizing why you should skip on a “risky” trade that feels scary, instead of succumbing to the fear and rationalizing it, first be aware of these automatic thoughts, and then look at the reward/risk and the general odds. If they’re good, quickly use the following visualization:

Picture a long line of dots. Each dot is a trade. And this current trade is only one in that long line of similar trades. Since the line is so long you don’t care about the results of any specific dot. You just care about putting as many of these good dots on the line as possible.

And now you have the chance to put another good dot on the line. So just pull the trigger and feel good about it. Who cares if the market goes against you for a loss? You’re an aspiring pro trader. Think like one. And then go count the overall profits from the long line of dots.

  • Leo

    Another great article that captures the essence of trading. Not just in theory, but with practical advice. I work on attaining this mindset everyday, sometimes I succeed but sometimes I succumb to the kind of malaise thinking you have described above. Today being an example, where I took 2 longs at support zones and having been stopped out, momentarily hesitated on a third long and found excuses to pass on it (1437) – would’ve paid 2 x R and it was the difference between a recovery B/E day and a losing day. This will be worth printing out and rehearsing before every trading day for me – particularly the bit about the dots where I know I have to detach myself from the outcome of any individual trade but tend to fall into the “trap” when the moment comes. Thanks Ziad, always appreciate your posts!

    • Leo

      … Accidentally voted down my own reply lol

      • lol. You don’t wanna do that! I voted it up to balance it out, and it seems others did too :) Glad you liked the post. I can relate to what you’re going through Leo. This is probably the toughest mindset to form. And there are times where I find it hard too! But you just gotta keep conditioning your mind. Over and over. Until it basically feels wrong to do it any other way. Best of luck to you with it!

  • Bryce

    Great post Ziad…I have found Trading In The Zone very helpful with developing a probabilistic mind set. A few quotes:

    “The Trader’s Edge: Thinking
    In Probabilities:The market is always communicating in probabilities. At the
    collective level, your edge may look perfect in every respect; but at the
    individual level, every trader who has the potential to act as a force on price
    movement can negate the positive outcome of that edge. To think in
    probabilities, you have to create a mental framework or mind-set that is
    consistent with the underlying principles of a probabilistic environment. A
    probabilistic mind-set pertaining to trading consists of five fundamental

    Anything can happen.

    You don’t need to know what is going to happen next in order to make money.

    There is a random distribution between wins and losses for any given set of
    variables that define an edge.

    An edge is nothing more than an indication of a higher probability of one thing
    happening over another.

    Every moment in the market is unique.”

    –Mark Douglas (Trading In The

    “If there is such a thing as
    a secret to the nature of trading, this is it: At the very core of one’s
    ability 1) to trade without fear or overconfidence, 2) perceive what the market
    is offering from its perspective, 3) stay completely focused in the “now
    moment opportunity flow,” and 4) spontaneously enter the “zone”,
    it is a strong virtually unshakable belief in an uncertain outcome with an edge
    in your favor. The best traders have evolved to the point where they believe,
    without a shred of doubt or internal conflict, that anything can
    happen.” –Mark Douglas (Trading In
    The Zone)

    “The following sub-beliefs
    are the building blocks that provide the underlying structure for what it means
    to be a consistent winner:

    I objectively identify my edges.

    I predefine the risk of every trade.

    I completely accept the risk or I am willing to let go of the trade.

    I act on my edges without reservation or hesitation.

    I pay myself as the market makes money available to me.

    I continually monitor my susceptibility for making errors.

    I understand the absolute necessity of these principles of consistent success
    and, therefore, never violate them.” –Mark Douglas (Trading In The Zone)

    • Thanks for the excellent comment Bryce! I absolutely agree that Trading in The Zone is a great resource for developing the right mindset, and I recommend it to all traders. Thanks especially for distilling the key ideas and principles here for us. Should be very helpful to any aspiring traders who read this, and they’re always a great reminder even for profitable traders. Great to have you on the blog.

  • This is actually topic I have never read about. It is so common and crucial, though. It occurs in my everyday trading and I dare say it determines my success of failure. Earlier I didn’t have no cue how huge impact it might have on trader’s performance.
    Since I realized that I found the cause of most problems. Unfortunately, I still struggle with this issue. This article is great reminder and offer interesting tip how to deal with it. Thanks, Ziad.
    Btw. Trading in the Zone is must-read book, highly recommended it.

    • When you say it determines your success or failure, you’re absolutely right Petr! This part of trading is huge. It’s what makes the difference between capitalizing on a strategy’s edge and degrading the edge by not taking the right trades. Very very important. We all struggle with it but it’s something you just have to keep working at. If you stick to it, it’s possible for it to become automatic for you. So don’t give up on it… it’s supposed to be hard ;)

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