Friday, October 12, 2012

7 Signs That You're Trading in the Danger Zone

From a friend who email this to me.

7 Signs That You're Trading in the Danger Zone

There are warning signs that a trader is going down the wrong road in a trade or in their trading in general. Traders have to go with the flow of the market, manage risk, and keep their mind open to actual price action. Departing from these principles are dangerous and could result in huge draw downs in capital and even blowing up their accounts. Trading through the filters of fear, greed, or ego are very dangerous.

1) You stop trading your plan and start “shooting from the hip” you are losing or winning so you believe that you are above your own rules, you start trading your opinions instead of your plan.

2) You are about to take a trade you are 100% sure of, you have no doubt that it will work out. Trades that feel good to do and feel like can’t lose trades rarely win because everyone is already positioned in those trades.

3) When you ignore your first stop and start deciding that you should give your trade “more room”, when you allow a loss to grow and rationalize why you should hold it instead of following your plan and stopping out you are in trouble.

4) Averaging down in a position that is going against you is never a good idea, fighting trends are very dangerous amplifying your losses by increasing your position size can be fatal to your account.

5) Fighting against the prevailing market trend over an over again can chop your account to pieces.

6) When losing, you start trading bigger and bigger to get back to even. When you are losing you should start trading smaller and smaller to decrease losses.

7) When you actually disagree with the market and believe it is wrong and you are right. Price is reality wherever it is, your job is to trade trend and price action not your own opinion.


coconut said...

how can one argue the above points but i like to look into details.

4 and 6 are the same. traders with that kind of mentality never want to lose and can't take losses. they are motivated only based on bottom line and that is to win every trade. they feel bad after a losing day.

coconut said...

1, i take both descretion and mechanical. its impossible to trade 100% mechanically. the best way for me is turn my opinion into plan (strategy) and from the plan seeking new opinions but i try to minimise it.

i agree opinion do more harm then good in trading.

coconut said...

7, i view of market always wrong, that is why the market moves, he is trying to find the equalibium point and never found it.

in another words, the market is always constantly trying to find the balancing point.

thus i never agree with the market (price) as long as i also don't agree with my own opinion.

coconut said...

by the way, can someone really 100% sure that a trade will work out?

if i take each trade as a single trade by itself, i can't even reach 51%.

but if i take in all the trades combine would my confident start to increase just a little bit.