There are a lot of pitfalls in trading and it is only a matter of time before one of them starts to challenge you in ways you could not imagine.
Traders often hear about trading psychology and how important it is to understand how issues with psychology can influence your trading results.
Make no mistake that with a few exceptions, the psychological aspects of trading are what do most traders in assuming a trader is using a positive expectancy trading system.
Along with a positive expectancy trading system, traders must have a trading plan that outlines every aspect of what makes up a trading opportunity. It sounds simple, just follow the plan, but anybody who tackles this business will find that it is not as easy as it appears.
Exit Trades At Set Profit Targets
One thing that dogged me in my early years (and still does at times) is the entire “leaving money on the table”. That is where you take your trading profits at a certain level and the market continues to go in the direction you were trading in.
As you watch price move, you silently calculate how much your account would have grown if you only let it ride instead of snatching at the profits that were available.
Many trading methods/systems have a profit target.
It could be a percentage of average true range, a support/resistance level or as simple as a trend line break. Once the level is hit, you exit and bank the profits. Some systems will use these targets as places to manage the risk you have in the market.
We all look to minimize risk knowing we can’t fully escape risk when you have an active trade on. When you exit out of the market, you no longer are at risk, right?
Yes and no.
Financially there is no risk. Mentally is an entirely different story.
How Much Did You Miss?
Watching the market pull away leaves you looking at your small but consistent gain and calculating how much you left on the table. For many people, this causes them to rethink how they are going to handle the exits in their trading.
Let’s assume that the profit targets set in your system are not entirely random. They are calculated through the moves of the markets and are objective using such things as a measured move.
Having these zones have the plus of keeping you consistent. Consistency in everything you do can never be overstated. The risk comes when you see how much you are “leaving” and decide to alter your trading plan.
The next trading day, determined to grab the extended move, you trail a portion of your position. Worse, you decide to ignore the profit target and choose to trail the whole thing.
Did You Make The Wrong Choice?
The problem is that every day in the market is unique and this day, the day you change your trading plan, the market is not moving as well. Price rockets towards your objective profit target but instead of exiting, you trail. T
he market reverses and takes you out.
Worse, price did not go far enough to trail so your original stop loss is hit because you ignored the adverse price action against you.
You realize that changing your trade plan on the fly is not a good practice and you return to the original plan where you have found steady success.
The following day you choose to exit at your target. Of course, this is a trend day and the market exceeds your target and was a great one to trail. Kicking yourself, you decide that the next trade will be a “let your profits run” trade and of course, the next trade does not move like the first trade.
A feedback loop begins and it’s not long before you are off track and the consistency in results you once enjoyed, are gone.
You Lack Consistency In Trading
Knee jerk reaction has caused you to lose one of the most important traits a trader can have: Consistency.
Believe that once one wheel comes off the wagon, the others are sure to follow.
You will miss trades.
Perhaps these moves fall outside of your trading time frame or they don’t suit your setup according to your plan. These trades will rocket away and give those that are in the market a nice win. You can’t be in every move of the market.
Accept that you will not only miss huge runs but you will also exit trades that will go on huge runs.
The fact is that taking your profit target consistently already puts you on the side of the winning trader. Most who enter the trading world end up losing and most don’t follow any type of trading plan or a set trading strategy.
Sticking to what is consistent and banking those targets when reached is following a plan. Following a trading plan will keep you out of the RISK of deviating due to market events. You are trading a winning plan. Be happy with that and make your goal all about compounding.
Take your quick hits and allow your account to grow consistently.
Then, those profit target winners will become larger simply by increasing position sizing. Leaving money on the table will no longer be an issue because the money you take off the table, is substantial.