The biggest mistakes Retail Traders

The fallacy of finding the perfect trading methodology 

A lot of people in the trading space will tell you that the reason you’re not successful is because you’re not following their exact methodology, or using their software, or trading through their specific brokers. A common idea is that the major mistakes most retail traders make is that they don’t trade the right strategy or follow the right methodology. It’s as if there’s a secret magic formula that exists that is THE way to trade profitably, and your problem is, you haven’t discovered it yet.

The wonderful thing about the markets is that there are many routes to the same destination, and many ways to be profitable. Let’s make an analogy with weight loss: some people lose weight by running, some by playing sports, some by limiting portion size, some by cutting carbs, some by following weight loss programs. Some people fail at those, some people succeed. But there isn’t just one way. Some methods work better for some people and worse for others, but there are many routes to the same goal.

Staying consistent is the key to lasting success in trading 

The key to success in any of those weight loss methods is tracking and consistency. If you eat salads one week then pizza the next, work out every day for one month and not at all for a month after that, your results will be all over the place, inconsistent and frustrating. This often leads to a feeling of failure and ultimately giving up, only to do the same cycle again in January!

Ultimately, the same concept applies to trading. Once a trader has discovered a profitable trading method initially, and follows the rules. Perhaps the trader makes profit in the very first trade, in turn, three lost trades in a row. The trader loses confidence and no longer sticks with his trading strategy. Without consistency, we’re less disciplined. Switching between trading methods when your edge is not truly present is destructive to your trading results eventually.

Then we hear someone else talking about their magic indicator, or strategy, or platform, and we think we just got it wrong the first time, so we try this new one… And maybe the first trade is a loser, 2nd a winner, 3rd a loser, but you’re still in profit though, so you keep going, then the next 5 are losers. And so the cycle repeats. The key to any success is tracking and consistency and it’s no different with trading or investing.

Building your trading strategy: Review & practice 

In my experience, the biggest mistake most traders make is changing their approach all the time based on very little data. 5 trades is nothing, the best traders in the world can lose 5 times in a row and it’s normal. If you’re managing your risk properly it shouldn’t hurt your account very much. But most of the time, a run of only a few bad trades causes retail traders to change what they do, back off for a while, or give up entirely.

The beauty of back-testing 

Of course, perhaps the strategy you’re running doesn’t work, so it doesn’t make sense to keep doing it, but in order to prove it doesn’t work, you have to have enough data. That’s where tracking comes in. Log enough trades (at least 30, the more the better) to really see a pattern of if it’s working or not, and if not, what could be tweaked to improve results. To save money, this is best done on a demo account. To save money and time, this is best done by back-testing. If you don’t know what back-testing is or how to do it, our back-testing course takes you through it step by step.

There are so many ways to trade, and just like fitness or weight loss programs, some may just not be for you for whatever reason, but with all the combination of variables that’s possible in the markets, there’s bound to be one that suits you! First understand your own variables such as time, money, and goals and you can then start to try different approaches that could suit you. 

In order to know which approaches will then work for you, you have to try for long enough and track it. The beauty of the markets is that you can do this in a simulated or back-testing environment so you can learn and try and test risk free and in a fraction of the normal time.

Plan, track, stay consistent, make changes based on real data, and you’ll definitely be ahead of the curve!