Staying Out of Bad Trades

Being a good trader is as much staying out of bad trades as it is making good trades. In fact, I would contend that staying out of bad trades is much more important than making good trades.

Many traders may know this. However, it’s one thing to know it, and it’s another thing to actually do it. And staying out of bad trades doesn’t just mean having a system that dictates which trades you should take. It also means searching within yourself as to what is leading you to make bad trades in the first place, and then fixing that.

In my early days of trading, while I had a decent trading system and made quite a few good trades, I was still getting into too many bad trades to be successful over the long run. And when I refer to a bad trade, I’m not just referring to a situation where perhaps I wouldn’t obey a stop loss or average up into a loser. I’m referring to situations where I was getting into trades I shouldn’t have gotten into in the first place. The question I had to ask myself was…what was leading me into getting into those trades?

One thing that I want to note is that a “bad trade” is a bad trade for YOU and your trading style. A bad trade could be someone else’s good trade, but it’s a bad trade for you because it doesn’t fit within your risk management, your entry/exit rules, your setups, etc.

Finding the Pattern

Typically, when you make bad trades, if you look hard enough, you may find a pattern…something in common with the bad trades that you are making. This can be extremely useful in helping to fix the problem. When I searched within myself, and looked at the bad trades I was making, I found that I had a tendency to make bad trades when I made a rushed trading decision. Whether it was trading off of an alert in a chatroom, off of an alert service, or off of someone’s tweet, I would make a rapid decision on a stock that many times was not even on my watchlist or hadn’t really thought about ahead of time. What I found with myself was that I wasn’t very good when making rushed decisions.  Then, after getting into the trade, I wouldn’t have a clear idea of how I would get out. Where would I take profits? Where would I set a stop? Is this even a trade with a good risk/reward? And one bad decision would sometimes lead to another bad decision, such as averaging up on a loser.

Avoiding Rushed Decisions

The key for me was to stay out of making rushed trading decisions, and that meant getting rid of all outside influences. First, I stopped hanging out in trading chatrooms. While trading chatrooms were a good tool for me for a long time in terms of learning what would work and not work for me, it had started to become more of a hindrance as I was occasionally getting myself into trades that weren’t right for me or my style. I was making rushed decisions that would cost me money. Also, sometimes seeing other traders make money when I wasn’t making any trades was tempting me to jump into trades that weren’t a part of my core strategies. Likewise, I stopped looking at twitter during market hours, as I found that was doing the same thing based on the tweets of other traders. Whether it was traders tweeting trades ideas or tweeting their profits, I was too tempted to jump into trades that weren’t a part of my own strategies. I also unfollowed a number of traders on social media and canceled all of my alert subscriptions. Overall I minimized as much noise and distraction as I could during the trading day.

I decided that my trading would just be me and me alone.  Everything that I would trade would be on a preplanned watchlist that I had made for myself, as I knew that I always traded best when trading my own setups.

When I made the above changes, it made an enormous difference in my trading performance. In fact, out of all the tweaks and changes I’ve made to my trading over time, it’s been one of the biggest difference makers in terms of my performance (the others have been improvements in risk management). Not only did it make a difference in my performance, but it also made trading less stressful. It freed up time for me to do other things. I no longer felt like I have to be by the computer all the time. I was taking less trades per day and making more money. I was trading much more calmly, and making better trading decisions.

If you are struggling in your trading, try to figure out what is leading you to make poor trading decisions, and make an effort to correct that. It can go a long way to helping you be a successful trader.

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