Top 7 reasons why you are losing money trading (and how to stop losing it)
Take a look at your charts, plug in whatever indicator you like the most and ask yourself this question:
If it looks that easy, why am I still losing money trading?
I mean look at this chart (which is the AUDUSD daily chart by the way):
What can you do with this chart?
Kind of easy isn’t it?
The strategy here would be:
When the market gets close to the top of the range it gets rejected, so I’ll start looking for rejection signs and then look for short opportunities. Likewise, when it gets to the bottom of the range it gets rejected, so I’ll look for rejection signs and then look for long opportunities.
All we have to do here is create a plan and be ready to trade when the market is ready to move.
If it is that easy, why is it that we struggle to make a profit?
Let me tell you why:
Because we are all humans, and humans make mistakes.
Luckily for you, I’ve tracked some of the most common mistakes traders are likely to make along with the solution.
Here we go.
You don’t have a system/plan
It doesn’t matter how much money you made the previous month. What really matters is whether or not you are going to be able to replicate those results.
This is why I don’t recommend to trade the news announcements, because the market always reacts in a different way, and there is no way to know in advance the reaction of the market.
The same happens when you don’t have a system: you went long because you felt like that, some other day you followed someone else’s advice, the next day because indicator X told you to do so, etc.
Lets say you get a killer month, you made 1000 pips.
How on earth are you going to be able to replicate those results if you don’t even remember why you traded yesterday.
What if something goes wrong?
Let say you are down 300 pips…
How on earth are you going to fix it if you dont even know what went wrong?
You see what I mean?
If you are serious about trading, you need to trade based on a system. This way you’ll know what to fix when things dont go as you expected them to go, and replicate the things that you did well.
What kind of a system do you need?
This deserved its own article, but here are a few tips:
Make it simple. KISS remember? Look, there are tons of indicators and strategies available, and I’ve always learned that the simpler ones perform better (by large).
As clear as water. It needs to be clear when you get your signal. Eliminate all confusing aspects of your system.
You are not adapting to the market condition
Its not the strongest the one that survives, but the one that adapts to the market conditions.
Look, market conditions change form time to time.
Sometimes the market is fast and really moves, it takes only a few hours to move from an important level to the other, etc.
And some others it moves in slow motion, it takes for ever to move from one level to the other.
Some other times the market is difficult to trade, it gets rejected from random levels, therefor its difficult to trade.
There are other times that the market trades in a very smooth way, it goes from one level to the other, gets rejected at the exact level and moves forward to the next one.
See what I’m talking about?
Look, if you are waiting for the market to adapt to your trading style or strategy? Keep waiting… because that is never going to happen.
You need to learn the different phases of the market, and adapt your trading style and your strategy.
You don’t feel comfortable with the system you are trading with
I know you’ve hear two of the most common problems for traders are: discipline and patience.
You need to be discipline to get consistent results and by discipline I mean following your system to a 100%.
But you also need to be patient, which is somehow related to discipline, because you need to wait for the right time to trade the market (but if you are disciplined, you are also waiting for the right time right?).
The only way to be discipline and patient (and therefore being a consistent trader), is by using a system you feel comfortable with.
This is the reason two traders using the same system get different results.
Every trader is different, they think different about risk, some of us like to trade the short term charts, some others focus on the long term charts, some trader use technical indicators, others just use price action…
You get the point right?
The idea is that you need to trade a system that suits different aspects of your trading including:
Risk profile: how many/much pips/money you are comfortable risking at any moment? per trade?
Trading style: are you comfortable with indicators, price action, Fibonacci?
Trading personality: are you a short term trader, or would you rather focus on the long term charts?
Time disposal: How many hours are you going to be able to monitor the market?
You are not using multiple timeframes
I know… some of you would say: why would I monitor the long term charts if I’m a short term trader?
Or long term traders might think they don’t need the short term charts…
Ohhh men. I used to be that way, but not anymore.
Here is the deal:
For short term traders:
Even if you like to trade off the short term charts, it always pays to trade in the direction of the trend of the market.
It doesn’t matter what happens on the short term charts, the market will alway be likely to move in the direction of the trend of the market.
That’s it! You don’t need more explanation, do you?
Imagine what the impact could be to your trading account of trading only in the direction of the market condition?
Pretty large isn’t it?
Hey, wait a minute, what If I only trade one pair?
Well…expand your horizon, find a pair that has a bullish market condition and look for long opportunities, and find another one in a bearish market condition, and look for short opportunities.
For long term traders:
Even if you only use the long term charts to do your analysis, etc. You could always switch over to the short term charts to pin point your trades.
Yes, yes, yes… I know what you are going to say: you don’t care about short term swings.
It’s not about short term swing, this is about profitability.
Lets say that based on your analysis, you plan to buy AUDUSD. You just plan to go long at the end of the day.
However if you look at the short term chart, you could spot different levels that could help your trade.
For instance, the market is just trading below an important resistance level in the short term charts, so instead of going long at the end of the day, you’d be better off setting a order to go long once the market breaks the resistance level.
Listen… This tip alone could be the difference between a profitable trader and a struggling trader (at least, that was my case).
You don’t manage your trades (Trade Management)
Ok, you open your trades and then what? What do you do?
There are traders that like to open their trades and leave them alone. I used to trade like that, but I don’t do it anymore.
I stop doing it because the market has changed… A few years back the market used to move in a smoother way… market swings were less volatile, just a few retracements here and there, and then the market moved in the intended direction.
Today it’s different though, so you need to make sure you take some profits out of the market when possible.
And I don’t mean to take profits just for the sake of taking profits, use sound techniques to do it (i.e. when the market gets close to an important level).
Taking partial profits is just part of the equation, there are more things you can do to manage your trade:
Partial profits (or losses): close a portion of your trade (i.e. half of your trade) when it meets certain criteria.
Pyramid in: Increase your trade size as the market moves on your favor. I’ve benefited from this more than any other technique around. Make sure your trade is large when the you are in the right side of the market.
Trailing Stop: move your stop loss as the market keeps moving on your favor. You need to be careful though, place your stop loss too close to the market and you’ll get stopped out. Give your trade enough room to breath.
I guess trade management is about being an opportunist.
When the market moves on your favor, do what ever is in your hands (following your risk management rules) to increase your trading size. Make it as large as possible.
And when the market moves against you, make it as smaller as possible.
You don’t use risk and money management
Many traders get confused about these two terms and to make sure we are in the right track, here you have what each one of them helps us with:
Risk management – Helps us determine how many pips to risk on each trade
Money management – Helps us determine the trade size of our next trade.
You can’t use a fixed amount of pips as your stop loss level, you need to use sound techniques such as:
Support and resistance levels
Deviation indicators (Bollinger bands and the like)
Indicator reading (MA crossover, RSI below 50, etc.)
There are two main benefits of using money management:
- As your account grows, money management allows you to increase the trade size allowing you to take advantage of the geometric growth of your account.
- Likewise, when you are not that accurate, and your account diminishes, money management helps you decrease the trade size.
All these makes sense right? When your system aligns with the market, you’ll make more profits, therefor you need to increase your trading size.
And when the market is out of sync with your system, you decrease your trading size because losses are likely to happen.
There are a few money management techniques that you can use (all anti-martingale):
One contract for every $XXXX. Increase the trade size for every $1000 gained.
Fixed Fractional trading. Risk a certain percentage on every trade (i.e. 1%)
Fixed Ratio. A little more complex technique (very aggressive by the way). For more info about this check out this FREE Advanced course.
You are not comfortable with losses
If you are a trader or want to be a trader you need to know something:
You are a risk-taker
And how do you define a risk-taker?
Someone who is taking risks for the possibility to get something else (perhaps something more valuable) in return.
For traders, we are risking an amount of pips, to get another amount of pips right?
Ok, now think about this:
Why would you feel uncomfortable when you get stopped out?
For one reason: Because you are not comfortable with losses.
Once you feel comfortable with losses, trading will become much easier, you’ll start seeing things that you were blocking before.
How do I become more comfortable with losses?
Accept the fact that each trade has the possibility to move against you. Train yourself to think in that way, and eventually you’ll see the difference.
What do you think about these 7 mistakes? Do you make any of them?
Do you think there are other common mistakes?
Let me know in the comment section.