Saturday, June 23, 2012

The Worst Mistake a Trader Can Make

We’ve heard the laundry list of trader pitfalls time and time again – they range from overtrading and adding to losing positions to fighting the trend, indicator abuse, and not allowing profits to run on winning trades. These are all great pieces of wisdom, however, the one pitfall which I have seen hurt traders more than any other and from which many of the other pitfalls are often derived is trading too large.
Trading too much size as a percentage of ones account leads to many of the other pitfalls because it affects the trader’s decision making and causes them to do things that they otherwise wouldn’t do such as:
  • Overtrading resulting from stops that are too tight because the position is too large
  • Not adhering to stops and/or adding to losers because “they can’t take such a big loss”
  • Using confirmation bias and/or indicator abuse to justify remaining in a trade that they would otherwise close out
  • Taking profits simply because the trader has a big P&L not because it’s objectively the right decision
  • Subjecting oneself to market noise (small price deviations) instead of being able to withstand normal market fluctuations because the position is too large
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