I received a very touching email from a subscriber, Michael (name changed):
"First, thank you very much for your website. I lost my whole account trading the Emini. I’m so upset. I don’t know how I should start again. Please, can you help me?"
Rather than send Michael a quick response, I thought I might spend some time writing a considered reply and publish it on Emini-Watch.com. So here goes.
Michael, I would suggest you do two things:
- Ask yourself whether trading really is for you and be brutally honest in your answer
- If trading is for you, then go back through every one of your trades and figure out what mistakes you are making
Trading Psychology and Types of Trader
In answering the first question, the following schematic might be helpful. In my experience there are 4 types of trader:
Trading Psychology and Types of Trader
Under-Capitalized Newbies: You’d be surprised how many emails I get from people who have just lost their job, scraped together $5,000 and want to make a living trading. Or attended a broker’s sales presentation showing how easy it is to trade and offering ridiculously low margins. Or just want to buy a high profit-factor trading system and auto-trade it to incredible riches.
These people have no idea what they’re getting themselves into – they are "cannon fodder" for the Professionals. Michael, if you fall into this category and don’t have the stamina to succeed as a trader, then walk away – there are easier ways to make a living, trust me.
Doctor, Dentist, CEO, Lawyer: These are generally smart people who are used to being successful. However, when they start trading, all of a sudden they find it’s harder than it looks. The skills that got them to where they are professionally (being smarter than most, being good with customers or colleagues, corporate ladder climbing) don’t mean a thing trading.
But they’ve got deep pockets and they can always recoup their trading losses with their day jobs. Michael, it doesn’t sound like you’re one of these but if you are, trade smaller and make sure your losses are much, much less than your regular income.
Thrill-Seeker: There are plenty of traders that enjoy the thrill. Some years they are up, some they are down. They trade capital they can afford to lose and probably have most of their money in Mutual Funds or High-Yield Bonds. For them the motivation is partly about being able to say they’re a "trader" at dinner parties, always having an opinion about which way the market is going.
Don’t get me wrong – I like these kinds of traders. They are great company, always reading the latest books, always experimenting with new ideas. They’ll survive in the long haul and preserve their capital. Michael, if you are one of these traders then put your head down, rebuild your stake, figure out what went wrong and start again slowly.
Professional Trader: In my opinion two things separate the Professional from the herd. Firstly, being able to override your instincts and take the "hard" trades – not trying to pick the top or bottom, waiting until you get a high probability setup, following your trading rules even when it feels wrong.
Secondly, being consistent – day after day, month after month – making small gains every day rather than big wins followed by big losses. Approaching trading like a business – methodical, logical, dedicated.
Trading Psychology and Figuring Out Your Mistakes
Michael, if you’re not ready to quit then my best advice is to go back through every one of your trades and figure out what mistakes you are making. Try and remember the circumstances of every trade – what was your trigger for entering, what were your indicators saying, what data biased your opinion in taking the trade, how were you feeling physically and emotionally.
I keep a trading log and fill in it religiously after every trade. It obviously includes entry, exit, profit, contracts traded, etc. for every trade. But I also evaluate every trade against the 7 Deadly Sins that I make trading. Obviously the goal is to make fewer and fewer mistakes over time.
I keep my trading log in an Excel spreadsheet and it’s calculating a running total of my performance against my Deadly Sins. I’ve got to such a point that even as I’m entering a trade I can feel if it’s violating one of my rules.
So, here’s my list of 7 Deadly Sins:
- Trying to pick top or bottom ("Billy, Don’t Be a Hero" starts playing in my head)
- My gut tells me that we’re going to break out (Professionals love fading breakouts)
- No confirmation from my Volume indicators (wait for everything to line up)
- Hesitating on entry (typically when the trade is "hard" to take)
- Canceling my stop (OMG, the biggest Sin of them all !)
- Moving my profit target (got to let the winners run)
- Letting a profitable trade turn into a loser (luckily, a rarity)
If you love trading then you’ll gladly go through this exercise. Evaluate your mistakes and understand what is working for you and what is not. Remember "Watch a man in times of adversity to discover what kind of man he is".
Michael, I hope this helps. Good luck with your Emini trading.
