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Five trading traps to avoid

Photo of Louise Bedford, trading educator By Louise Bedford, trading educator

min read

Great traders know money management and mindset are the key.

Let’s face it, the Australian markets are seriously challenging. Picking a winner is tough, yet there are still people making money.

As a trading mentor, I see a lot of trading plans. Frankly, if you are trading without a written trading plan that covers entry, exit and position sizing, you are in a major pickle. But other than that, there are five major mistakes traders are making.

1) Trading only in congestion

Overhead resistance is your enemy.

Have you heard about how they train fleas to perform in a flea circus? They keep them in a shoebox for a couple of days. Every time they hit their head on the top of the box, it hurts, so they learn to jump to a height just under the lid. When the box is opened, the fleas never again try to jump any higher than the rim of the box. Callous, yet effective.

Shares are the same. If they have kept hitting their head on overhead resistance (a price ceiling for the stock) in the past, unless they take some lessons from Superman and break through resistance in a single bound, they are likely to just keep dropping back down.

Trade breakouts, supported by heavy relative volume, above previous levels of resistance – or you will suffer the consequences.

2) Entry fixation

When traders start out they are obsessed with indicators, entry and timing the market. The questions they ask are things like:

  • What moving average do you use?
  • What is the calculation of the Stochastic indicator?

These types of queries tend to dominate 90 per cent of the question time of any seminar I have run. Some never progress beyond this level, even though they may have been trading for years.

A 1991 study into 82 large US pension funds over 10 years found that differences in money management techniques explained 91.5 per cent of the variance in their returns. How you choose an entry point has little to do with your ultimate success in the sharemarket.

Exceptional traders realise that money management and mindset are the key.

3) Not getting back in

Yes, it hurts when you get a hit in the markets. It can sting, not only your account, but also your ego. However, unless you learn to suck it up, you’ll stay out when the markets have begun to throw money around again.

Get over it and try again. Enter on your very next trading signal. Then you will be in the right place at the right time when the markets boom again.

It is tempting to tell ourselves that “it’s OK to wait” and “the market will always be there” – as we give ourselves excuses for not taking the next trade. But face facts: if you sit on the sidelines for too long you may miss out on the opportunity that will double your trading equity.

Every shot at a trade does matter. If you start thinking that in the grand scheme of things “it’s OK to miss a trade”, you will soon find yourself out of the game.
People say, “que sera sera”, or “take it easy”, or “you can’t win them all”. Who says these things? Poor people, that’s who – poor people and bad traders.
 
4) Expecting applause

I have no interest in artificial success. There’s a trophy shop near my house. I could go and buy any trophy I want and engrave whatever I want on it, but that wouldn’t be real.

As a trader, my applause is money. It’s taken me a long time to realise there’s a big difference between actual success and artificial success.

To focus on the former, while not being concerned over the latter, is quite a mind trick. It takes internal confidence.

We operate in a very unforgiving economy. It’s more cluttered with merit badges and participation awards than ever before. My kid came last the other day in a swimming race but still came home with a ribbon!

The world has gone mad. People are sabotaging their actual success with artificial success in more bizarre and deluded ways than I thought would ever be possible.

Activity is being recognised, but not accomplishment. It’s addictive. It’s soaked in peer pressure. It’s not real.

If you want to be in the top 5 per cent or even 1 per cent of income earners you must be the one to give yourself a pat on the back when the time is right. Don’t fall victim to measuring yourself on artificial success. The only type of success in the markets is visible in your bank balance.

5) Hanging out with toxic people

Who do you have in your life that is toxic? Do they make you shrink when you should be expanding? Who are you letting remain toxic, because it's too hard to stand up to them, or to counter their toxicity?

I tend to smile easily. I feel true gratitude for the strength of my body and the strength of my mind. It drives the dour sods who gravitate toward negativity completely batty. These days a frown is the new norm. Unless you’re wearing one, you just aren’t taken seriously. People like to equate “happy” with the word “idiot”.

What evasive action have you planned to take the next time someone gives you flack for making a difference in your life? Unless you plan your response, their distorted views will bring you down.

With the markets around the world in a state of change, you are going to need all the help you can get to stay clear and focused. Now is the time to think about what you value most in life, and put into place the building blocks to help you achieve your goals.

Your future is unwritten, other than the story you create for yourself. Avoid these five mistakes and you will be one step closer to living your ideal life – your trader’s life.

About the author

Louise Bedford (www.tradinggame.com.au) is a full-time private trader and author of several best-selling books, including The Secret of Candlestick Charting, Charting Secrets and Trading Secrets. For her free Trading Plan Template, click here.

From ASX

The ASX Sharemarket Game is one of the world's great real-time trading games and the only type of its kind in Australia. Each player has a notional $50,000 to invest over 10 to 15 weeks, with a maximum of 10 orders a day to buy and sell. No more than 25 per cent of the portfolio's value can be held in one share. ASX Sharemarket Games provides more information on the Schools and Public sharemarket games.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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