New traders often come into trading with unrealistic expectations in terms of profitability and success. Unfortunately, the instincts to succeed in trading are not natural for most people. You have to completely re-program yourself to instill the habits you need to become a winning trader. Knowing what obstacles you have to overcome and knowing how to overcome them.
1.The Need For Instant Gratification
Instant gratification is becoming easier and more accessible every day. Smartphones give us the opportunity to be entertained and stimulated at a moment’s notice, no matter where we are. However, the need for instant gratification has made patience extremely scarce. Patience is the main difference between winning and losing traders.
New traders, when they get it into a stock expect it immediately to start going in their favor. The reality is that the biggest moves in the stock market rarely happen in a short period of time. Even when you are day trading volatile stocks, homerun trades will usually take hours to play out, which in today’s world feels like a lifetime. Jesse Livermore put it perfectly: “Money in the stock market is made by sitting, not trading”.
2. Your Ego
Know one likes being wrong. It is in our nature to want to be right, and even avoid/ block out evidence that is pointing to contradictory evidence to our own beliefs. In order to become a consistently profitable trader, you have to master your ego and get used to being wrong. In trading, losing trades are inevitable. No strategy has a 100% win rate. When the market is telling you your thesis is wrong you have to listen, and take the loss.
If you cannot control your ego, one loss can wipe out weeks and even months of gains. If you get stubborn and do not size your positions correctly, your trading account can be blown up in minutes or hours. If you cannot keep your losses small, you will never be able to trade for a living. If stubbornness is a big issue in your trading, use hard stops to automate the process of taking losses.
3. Focusing On The Small Picture
It is easy for traders to get focused too much on intraday fluctuations in a stock’s price. When you look at 1-minute chart, it is easy to think the stock is in a major downtrend or uptrend when it is just a small pullback. You always have to be focusing on the bigger picture in trading. You always have to be focusing on the daily chart of the stock, even if you are day trading on the 5 minute time frame.
Traders will have a similar issue when looking at their trading performance. In trading, is it easy to feel like you are a failure of a trader right after you had a red day. It is also easy to feel you are a trading god after you have a big green day. The reality is one day does not define your trading career (unless you get very stubborn and take a massive loss that decimates your account).
You have to focus on your weekly and monthly PNL, not what happens day by day. You cannot control when your niche trading setups will appear. Some weeks you will be trading a ton because your setups are everywhere. Some weeks there will be nothing to trade. It is up to you to capitalize on your setups when they appear and stay on the sidelines when there is no money to be made.
4. Recency Bias
This phenomenon is a big issue to many new traders. Recency bias is defined as “when people more prominently recall and emphasize recent events and observations than those in the near or distant past.” In trading, it is easy to have confidence after you put on a winning trade and pull the trigger as soon as your setup appears. However after you have just had a losing trade, it is easy to feel fear and hesitation taking a niche setup because you just had a losing trade on the same setup.
Assuming you’re trading a strategy with an edge, you cannot let the last trade affect how you treat the next one. Every trade is completely independent of each other. You cannot let the results of recent trades affect how you approach the next trade if you are trading with a profitable strategy. Constantly study your winning trades to continually remind yourself “my strategy works, and the only way I can be in the winning trades is to pull the trigger when my setup is there”.
5. Fear-Based Decision Making
“Scared money don’t make no money”. In trading, this saying is quite accurate. Trading with too much fear will cause you to make decisions that will lose you money, and miss out on big opportunities. Fear will cause you to take profits too early, and stop out early before the market has indicated your trade thesis is invalid.
New traders will also get FOMO (fear of missing out) after they miss a big move in the markets, and then make a rash decision because they missed out on a big opportunity. Trading small will significantly reduce the amount of fear in your trading. Ideally, you are risking around 1% of your trading account at max per trade you take.
Trading small will keep you more focused on the signals the market is telling you, and less on your PNL and your money that is being risked. Learn more about how to size your trades in this article here.
Join Our Live Trading Boot Camp!
Spots in our next live trading boot camp are almost gone. Learn the trading strategies we’ve been using in the markets for the past two decades. Class starts soon!
