Many traders have made fatal mistakes in their trading career. However, there is one crucial habit that traders do that leads to more significant losses, though unknowingly. It doesn’t look like a mistake, as many traders think that it’s a way to maintain a profitable trade. It disguises to be a positive move but only in the mind of a deceived trader.
What is this fatal mistake? Visualize this. The market is at its peak then breaks out above resistance level. Although, price movement would be weaker if this breakout were legitimate. Then you observe divergences in the price behavior in the market, so you conclude that the price would be dropping further. You get ready to sell.
However, a thought hits you. You think about how this weak price movement is only momentarily and that the market will get stronger. You convince yourself that it is characteristic of a breakout, after all. Then you hold off your trade. You remember the prudent risk measures that you take. You think that while selling at that moment is the right choice, and you can wait for the market to get stronger and end up with a lower risk trade. There was no need to conclude selling if there was potential that the breakout is leading to the market’s momentum.
And you were right. The market does rise, and it was the right choice you opted out from selling too soon. You could have ended up with a more significant loss if you did, but is that the case? Could this thinking be the fatal mistake that you and many more traders have been doing unknowingly?
And you were right. The market does rise, and it was the right choice you opted out from selling too soon. You could have ended up with a more significant loss if you did, but is that the case? Could this thinking be the fatal mistake that you and many more traders have been doing unknowingly?
If you stepped back and thought about things, you’d realize that 70% of weak breakouts like this fail and reverse. If you have a 4 point stop and 8 points of potential reward, your reward to risk ratio is 2:1. Furthermore, if you take 40 of this kind of trade over a few months, you’ll gain 44 points [(70% x 40 x 2) – (30% x 40 x1)]. So despite having avoided a supposed loss, you’ve only let go of a substantial positive expectancy trade. Every time you skip it, you will miss an 8-point trade. Over a few months, you will lose 44 profit points. This is the fatal mistake that many traders have been doing. And it is the difference between being a profitable and a losing trader.
To avoid making this fatal trading mistake, you must admit that you are susceptible to deception. Your mind naturally rationalizes things, but it is also capable of lying. Avoiding trades that could go against you does not make you a prudent trader because ANY trade can go against you. This is why you must catch yourself whenever you are thinking of making this trading mistake. You must also consider a long series of trades and feel of the overall outcome of 30 or 100 trades. Then, trade on that basis.
The next time you find yourself rationalizing why you should skip a “risky” trade, instead of yielding to your fear and trying to justify it, try to shun your thoughts with awareness. When you catch yourself thinking like this again, weigh the reward/risk ratio and general odds. If you know they are right, use this visualization:
Visualize a long line of black dots laid on a white sheet. Each black dot represents one trade. The current trade you are dealing with is only one black dot in that long line of trades. The line of black dots is so long that the result of one trade will not significantly affect the line of dots in a higher view. What is essential is to keep the line of right dots going, putting as many as possible.
Now you have the chance to add another right, black dot on the line. So, instead of hesitating, go through with the trade and feel good about the choice you made. Who cares if the market goes against you with a loss? You aspire to be a pro trader, so think like one. Then, reevaluate the line of black dots and count the overall profits you made.