I chance upon this article by Ryan Jones yesterday while i was researching on options. I find it quite meaningful and some of the sins i do encounter personally. So i hope that you guys will be benefit from this article.
1.Focusing a majority of time on technical analysis and trying to predict price action.
Do you know how many indicators have been created for trading? Approximately two and the both do essentially the same thing. Funny thing is though, there are a million different names for them. 99% of all indicators that are derived from price action do essentially the same thing. Do you know what that is? Most indicators simply tell you where price action is now compared to where it has been in the past.
There is no indicator out there that is derived from price action that will tell you where the market is going to go. Many traders may say that they agree with this, but how they practically apply indicators, and more importantly, by the vast amount of time they spend looking for and/or creating that “perfect” indicators says differently.
There is a time and place for indicators and technical analysis, but don’t waste most of your time trying to get that perfect one. You will be far better off understanding what they are, finding one that you are comfortable with and then spend your time making sure that other areas are being taken care of (i.e. expectations, money management, etc.). Those who system hop looking for that perfect one never spend the time to build a foundation and usually end up losing.
2.Buying short-term, out of the money options.
For a long time, options have been the beginning ground for many, many traders. They were for me. Buy short-term, out of the money options (because they are cheap), and you have the potential of amassing a huge return in a short period of time. Uh huh.
What you have is a fast track to losing money. I could be a little off on this, but there are better odds that you will walk into a casino and come out a winner. The only way you should buy short-term out of the money options is if you have one KILLER market timing strategy; you then could amass a fortune.
Truth is, there are four things that could happen for you to lose buying these types of options, and only one very unlikely event that will produce a profit. Think about it. If you buy an option and the market goes in your favor, but not past the strike price + whatever you paid for the option, AND within the time period of the option, you lose.
If the market stays the same, you lose. If the market moves against you, you lose. If the market moves in your favor but not to the strike price, you lose. You have A LOT going against you. This type of option buying is common with traders, but you should stay far away from it.
3.Asking your broker what type of money management strategy to use.
There is one decision that every single trader makes when they place a trade whether they put any amount of thought to it or not. That decision is trade size. Every time you get into the market, you are making a trade size decision. Do I trade one, two, more, etc. This is the SINGLE most important trading decision that will affect your long-term success (or failure) in trading.
Many traders rely on what they feel is a good trade size, and many traders end up asking their broker, who then tells them “never risk more than 1% - 2% of your account on any given trade”. Well, that sounds good and all, but it is the most inefficient money management strategy you can use. If they say “trade one contract for every $10,000 in your account”, that is also one of the worst money management strategies you can use.
Most traders spend a majority of their time on technical analysis (where to get in and where to get out), but look where that has gotten most traders. You, you spend some serious time learning and understanding money management strategies. Proper money management can magnify profit potential dramatically AND at the very same time, keep you from blowing your account out when the system or strategy doesn’t work out. This is critically important if you want to stay in the game.
4.Over-Trading
I actually have two deadly trading sins that are money management related. Make no mistake about it, after speaking with thousands upon thousands of traders, after going through more than one lesson of my own, over trading (too much risk in the account) is the NUMBER ONE ACCOUNT KILLER by far.
Even those who understand money management principles can be guilty for several reasons. But the first thing is to understand what would be considered over trading for your account size, risk levels, goals and trading strategy being implemented. For that, you need to understand first and foremost the consequences of various money management strategies in order to implement the right one. Secondly, you need to understand the realistic expectations of your trading strategy, including worst case scenario. Only then will you know whether the money management strategy is too risky for that particular trading strategy.
5.Under-educating
Does an airline pilot fly a plane after reading a few books on the subject? How about a brain surgeon? Or perhaps a few seminars on top of the books properly prepare them? How about any skilled profession. Yet, the level of trading education that exists at the time of the first trade is dismal at best. Do you know how much education I had before I bought an option? I knew how to buy an option, and that is about it.
If 95% of traders lose, that might be the first hint that this requires some skill before you can expect to be successful, and even then it is not assured. Education is not learning about a strategy, or learning about a system that has 75% winners. It is UNDERSTANDING what is out there, why and what gives it any chance of actually making money in the long run. That goes far beyond learning to buy when the blue line is crossed and sell when the red line is crossed.
To make things worse, the amount of foundational education that is available is scarce. Everyone is pushing the seminars about buying above the blue line and selling below the red and all your dreams will come true. This is part of the reason that I require traders to go through one of my courses on any given specific strategy before they can access the rules or signals. You must build a foundation of understanding before you can expect to successfully trade.
6.Expectations of trading for a living.
Given all of the above, you may or may not have this expectation anymore based on where you are at (if you had it at all). It amazes me how many traders believe they can trade for a living yet knowing that most people don’t and most who have tried have failed. I promise you as sure as I am sitting here right now thinking about how I am going to bag me one big rat, if you are guilty of the trading sins above, the probability of you ever trading for a living is next to none.
7.Bringing ego into trading decisions.
Ego blinds people. This is almost always inextricably linked to many of the above. Many traders come into this endeavor knowing that most are not successful, or at least learn it pretty early on; yet that doesn’t stop them from doing the EXACT SAME THINGS that others are doing. This cannot be contributed to anything other than ego.
“I’m different”, “yeah, others may not have succeeded, but I have a medical degree” or law degree or engineering degree, or you fill in the blank. “I know many aren’t successful, but I’m not like them, I will be successful my first year”. Uh huh.
Approximately 65,000 traders are going to read this article and perhaps 100 will stop and say, “you know, I can’t keep doing what everyone else is doing and expect to succeed?. Most will continue doing what they have been doing and most will never be successful. I’ve learned this because I have bee in the industry for a long, long time. Ego is a killer and you need to slay it before it slays you.
About the Author
Ryan Jones is considered one of the trading industries “most complete traders”. Starting his trading career at the early age of 16, he had traded nearly every major market and strategy by the age of 21. At the age of 26, Ryan signed a book deal with John Wiley making him one of the youngest authors ever in the field of futures trading. His book, The Trading Game, Playing by the Numbers to Make Millions is still considered to be the authority on the subject of trading and money management by many leading traders. Ryan’s advanced experience and knowledge across many trading fields such as Technical Analysis, Option Trading, Money Management and the S&P have lead to several trading feats, including turning a $15,000 account into over $107,000 in less than 90-days short-term trading the S&P (real money).
