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.

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