Three Challenges to Conquer for Trading Success

Learning to trade is much more than just learning a strategy and applying it. In my classes I try to emphasize how important the psychological side of trading is to your trading success. This is why we could give 10 traders a completely mechanical trading system with very specific rules, and at the end of the month, there will most likely be 10 different results. Even though everybody was given the exact same rules to follow, human nature will cause people to override the rules because of the different psychological make-ups we all have.
Here are some of the things that could impact the results of this study:

  • Some traders will not accept losses and move their stops or worse, not have one in the market
  • Some traders will place their stops too close because they don’t like larger losses, or are trading undercapitalized – Scared Money
  • Others will take profits too early because they hear voices (Ego) in their heads telling them that if they don’t take profits now, the market will take it all back
  • Another saying that is so wrong goes like this, "You cannot go broke taking profits." Tell that to somebody with an upside down risk/reward ratio
  • Each person has an amount in their heads of how much money is enough for them. This will change the overall profit levels for all 10 traders

And the list goes on and on… The point is psychology actually determines our success or failure as a trader. I still believe that trading is 85% psychological, 10% risk management and 5% strategy. If you are just starting out in trading, keep this in mind. Too many times people are so busy looking for the Holy Grail trading strategy that they forget to work on the most important part of trading – themselves.
As we start to get experience in the trading arena, there will be three types of mental hurdles we need to learn how to clear.

  • Losing days
  • Boredom days
  • Winning days

Losing Days

As professional traders we need to accept that we are not perfect and that losses are inevitable in this business. Having a trading plan that spells out our risk management to take these facts into consideration is very important. For this reason, we only want to risk 1-2% of our account equity on any given day trade (swing trades perhaps 3-4%). Thinking in terms of probabilities, we would know that no one trade will wipe out our trading account. As a day trader using 2%, we would have to be wrong almost 50 times in a row before we lose our trading account. This allows us to remove some of the fear (emotions) from our trading.

Where the problem arises is when we have a series of losses and how it affects us. Even if you have a well thought out trading plan, it is very easy to lose the discipline to follow your rules when losses start to mount. Many traders come from a background of getting a pay check every week for working. This helps create stress and soon after, other emotions start to creep into our trading. What once seemed like the perfect plan to trade now seems to lack credibility. Some will now start to trade outside of their plan and use emotions to make their trading decisions. You can see where this path is leading to, revenge trading. Before long, your losses from following your plan are being compounded by making emotional trades and losing even more money. How many times have you been in this position and after a loss, you were tempted to hit the "Reverse" button on your matrix? The Reverse button will reverse your position in the market immediately. I nicknamed this button the "Casino Button" for obvious reasons. These are sure signs you have become a revenge trader. This is a path that will certainly wipe you out financially if you don’t correct it soon.

Recognizing you have become a revenge trader is very difficult to do. You are trading almost 100% emotionally now and you are not listening to any logical advice from yourself or others. For this reason, I created a financial circuit breaker for my trading. Just like a circuit breaker in your home will kick off before a fire starts and ruins your entire home, my trading circuit breaker forces me to stop trading. In my trading plan, I have listed a maximum dollar amount I can comfortably lose on any given trading day. Once I hit this level (and yes after 23 years of trading, I still have losing days), my plan calls for me to shut down my computer and leave the office regardless of the time of day or market environment.

If I did not have this circuit breaker in place, I might try and tell myself that I can make the money back in the afternoon or some other silly thought. Truth is, if I lost the money early in the day, there is a good chance that the best I could do by trading anymore that day is to lose even more money. There are going to be days where we are distracted by an event in our lives or just not focused on trading. The markets may not be conducive to our trading style that day. We could be having computer or platform problems. Regardless of the reason, I don’t have to know why before the circuit breaker kicks and I stop trading for that day. After I stop trading, I can identify the problem and deal with it tomorrow. Trying to work out issues while we are still trading is a recipe for disaster. After I get stopped out for the day and I leave my office as my plan calls for, I will reward myself with a nice dinner that evening. Always reward yourself for following your plan.

If you find that you have a couple of days in a row hitting your circuit breaker, perhaps you need some time off from trading. We all need this on a regular basis. Trading takes a lot of concentration and we need to take breaks to clear our minds and be prepared to battle the professionals another day.

By knowing about revenge trading, I have incorporated my circuit breaker into my plan and this is how I deal with losing days. You, too, should know how you will react to these losing days and have a plan ready to how you will react and what actions you will take before the losing day actually happens.

Boredom Days

These days are the most tricky to deal with because you usually don’t know you are in one until it is too late. Having a trading plan requires us to sit and wait for a setup. However, the market is not always so cooperative and willing to give us our setups in a timely manner, if at all. Many of us day traders like to trade the early morning session and be finished around lunch time. This works well if we get a setup and can take advantage of the opportunity. Otherwise, we are just sitting there staring at the screen. Another problem with boredom days is you lose your market focus more easily and before you know it, you are distracted with a phone call or day dreaming while looking out the window when a setup finally does occur.

This is a good time to have other markets to look at during the trading day. A nice feature of the Commodity Futures markets is how un-correlated they are, unlike the equity markets where when the Indexes are down, so are the vast majority of the stocks. For example, recently our stock indexes were choppy for several days awaiting the monthly unemployment number. While this was happening, the Wheat market was in a rampant bull move and provided some very good volatility. The Futures markets are always offering a market to trade somewhere.

Many of us were raised to think we are supposed to rise early every day and work hard all day long then come home and start all over the next day. For those of you who had the same parents I did, you can relate to this story. When I started trading some 23 years ago, my parents did not have a clue what I was doing. They just knew I was not leaving the house and fighting traffic to go to my job where I was supposed to physically work hard all day. As if learning to trade was not challenging enough, my mother loved to call me just before lunch and ask the usual question, "What have you been doing today?" This was a loaded question because there was no right answer if I was still home sitting in front of the computer. I would try and explain that I was trading and what I thought about the markets. Mind you, my family was not interested in the markets, but I thought this might help her understand that I really was working. Her reply was always the same, "You are not working, you are just sitting on your butt playing video games." Eventually, I learned not to answer the phone before lunch.

I can respect her opinion because she did not understand trading or my passion for it. The problem I had during my early years of trading was the boredom days and the fear of my mother calling and having to tell her I did not do anything that morning because I had no setup. I actually had some days where I would take an unplanned trade close to lunch time just to take a tick out of the market, knowing I was going to risk 8 ticks just so I could feel like I was working that day. It did not take me too long to figure out that those kinds of trades get expensive when you are wrong.

Something I have found useful to identify a possible boredom day early is to watch the first hour’s range of the market. This creates a high and low that unless broken, will contain the market in a tight range. I prefer to see this first hour’s range broken if I think there is any kind of chance for a good trading range that day.

These boredom days need to be addressed so you don’t make trades just because you are bored. If for some reason you do take the boredom trades, make sure you put that in your trading journal. No reason to blame your strategy for days when you did not follow your own rules.

Winning Days

I know some of you are thinking that winning days will be no problem. Actually, they can be if you get a windfall profit too early in your trading career and don’t know how to handle it. Or maybe you double or triple your account size (yes, this happens and you too will experience this one day) and you start getting a little careless selecting your trades.

Windfall profits in Commodity Futures can happen if you are positioned on the correct side of a limit move and you get a couple of days of these favorable moves, or the market runs in your direction quickly. With all the leverage in the Futures markets, a windfall profit is not out of the question on any given trading day. How we adapt to this sudden change in our trading capital is very important, just like the many people who have never had any appreciable money in their lives and now win a large lottery. Many of these people actually file bankruptcy a few years later because they just don’t know how to handle this much money so quickly. Our minds have to adapt to this new wealth in order to be able to manage it correctly. Being that the human mind is actually a muscle, we can relate it to any other muscle in the body. If we are at the gym working out, there is a good possibility of damaging a muscle if we try and increase our weight too much, too quickly. We have to gradually increase the weight over time in order to help the muscle grow and not damage it. Same in trading; we need to grow our accounts incrementally so that we can handle this extra capital in our accounts.

I hear stories of how people perceive their winnings all the time. It amazes me how people can actually call their profits house money; this is so far from the truth. You earned that money and took it from people who did not give it up easily. Never tell yourself it is just house money!

Most people start with small trading accounts in the Futures arena. This actually is a good thing for most traders who can follow their trading plans and money management. What this forces new traders to do is to be very selective in their trade selections. When you first start trading, you do all the analysis and then sit and wait for your setup. This is as close to perfect trading as you get. Then an amazing thing happens; your account begins to grow. Good thing, right? Not necessarily, if you don’t exercise some self-control and continue following your trading plan. Many people will become careless with this extra money in the account. I bet you never thought there would be a day you had extra money in your account; you will sooner than you think.

Unlike our near perfect new trader with the small account who sits patiently awaiting their setup, the trader with extra cash in their account is now feeling like they are playing with house money. This is where that feeling of house money can be dangerous. They begin to take more risky trades, perhaps trading too many contracts. Feeling invincible because they have made some money in the markets, they start trading like they are wearing Superman’s cape; be careful jumping out that window. Trading is a very humbling experience and believe me, you will pay for this attitude before long.

I would recommend that as your account grows, you identify what the bare bones minimum you can successfully trade with and keep your account to that size. Each month you can do account draws to keep your account at a bare minimum by transferring the funds to an interest bearing account somewhere. Keep these profits liquid in case you need to replenish your trading account. I would not recommend just spending all the extra money you have. Trading is a business and you will eventually need working capital to expand your business.

By keeping your account to a minimum, you will be forced to patiently await your setups and execute them accordingly. Otherwise, you may fall into that trap of thinking because you have extra funds laying around in your account that you can take more uncalculated risk in the market.

My intentions in this article were to make you aware of the different types of trading days that each of us will encounter. Some of us will have to experience each of these situations before we actually know how we will react. Regardless of how you figure out your reactions, I would recommend that you document them and then adjust your trading plan accordingly.

"I learned that good judgment comes from experience and that experience grows out of mistakes." Omar Bradely

Don Dawson can be contacted at The Online Trading Academy

Don has been trading the futures markets for 20 years.  His perseverance through the ups and downs of trading, openness to experience of others, balanced tolerance for risk and patience to wait for his setups are a few of his strengths as a trader.Don obtained his series 3 license in 1990.  Soon afterwards he registered as a Commodity Trading Advisor with the National Futures Association and formed his company Majestic Futures. He has been a guest speaker on Technical Analysis at Johns Hopkins University and a guest speaker on Business of Trading Radio Show  in Washington, DC.He continues to actively trade his personal account on a daily basis when not teaching for Online Trading Academy.  His teaching method has been referred to as "down to earth".  He understands the students need for a structured environment in the early stages of their trading education.  He uses humor to convey information in an accessible way. He is excited about sharing his passion for trading with others.  A quote he likes is "A candle loses nothing by lighting another candle".  He is now looking for a balance in life between trading and teaching others what he has learned from 20 years of trading.  He acknowledges that the best teacher is a student – always in learning mode and wanting to learn more by teaching.  He looks forward to working with each of you in one of his E-Mini Futures classes. He is also writing articles for Online Trading Academy's free newsletter "Lessons From the Pros" and hopes student's find this a valuable resource.

Don has been trading the futures markets for 20 years.  His perseverance through the ups and downs of trading, openness to experience of others, ...


We've just published a new T2W article called ( "Three Challenges to Conquer for Trading Success" by Don Dawson.

What's the chances of moving this off the dev. boards? It asks us pleb users for a dev password and thus we can't see the article which, from the title, I doubt was intended...........? Thank you.
this can be useful for any trader
but i want to say that there are not only three challenges that a trader will face in fact trading is a very hard work .you may face problem everyday ,if you want to be a sucessful trader you must bear more and carry on