www.informedtrades.com A lesson on two of the most common mistakes that traders make when trading the stock, futures and forex markets. One of the most common mistakes is sticking in a trade where you know you are right in your analysis, but the market continues to move against you. As the famous economist John Maynard Keynes once said: “The markets can remain irrational longer than you can remain solvent” Perhaps one of the best examples of this are those who shorted the NASDAQ into the runup in 1999 and early 2000. At the time it was pretty obvious that from a value standpoint NASDAQ stocks were way overvalued and that people’s expectations for growth that they were buying on were way out of line with reality. There were many great traders at the time who recognized this and began shorting the NASDAQ starting in late 99. As you can see from the below chart and the huge sell off that ensued after the peak in 2000, these traders were right in their analysis. Unfortunately for many of them however stocks continued to run up dramatically from already overvalued points in late 99 wiping out many of these traders who would eventually be proved correct. So as we learned about in last lesson, people’s strong desire to be right will often times keep them in trades that they should have moved on from even though the market may eventually prove them correct. For those traders who are able to initially move on from trades where they feel they are correct but the market moves against them, another common theme which arises is for a trader to initially stick to his plan, but after being proved correct and missing out on gains he becomes frustrated and deviates from his plan so that he will not miss out on another profitable opportunity. One place of many where I have seen this time and time again is when watching traders who trade reversals at support or resistance levels. Many times when the market touches a support or resistance level it will have a brief spike upwards or downwards which hits the stops of a trader looking to profit from the reversal, taking him out of the market just as it turns in his favor. Because many traders think a like, often times the level at which the trader is taken out of the market is right at his stop level as well. After this happens once or twice to a trader he will then stop placing hard stops in the market and instead convince himself that he will manage the trade if it moves against him. This may work a few times for the trader giving him more confidence in the strategy until the market does finally break. As we have learned about in previous lessons often times when the market breaks significant support or resistance levels it will break violently to the point where the trader in the above situation is quickly down a large amount on his trade. Typically what will happen at this point is instead of taking the big loss, learning his lesson, and moving on the trader will remain in the position or worse add to it with the hopes that the market will turn back in his favor. If the trader gets lucky and the market does turn back in his favor this only goes to support this bad habit which will eventually knock him out of the market. Successful traders realize that situations such as the above occur constantly in the market and that one of the main things that separates successful traders from unsuccessful ones is their ability to accept this, stick to their strategy, accept that loosing trades are a part of trading, and move onto the next trade when the market does not move in their favor. That’s our lesson for today. In our next lesson we are going to look at another major part of trading psychology which is related to not wanting to take losses which is people’s desire to follow the crowd. As always if you have any questions or comments please post them in the comments section below so we can all learn to trade together, and good luck with your trading!
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thanx……..is all i can give u in return………….it’s amazing to have so much powerful information at one place…..
You can never have too much knowledge. This is powerful information. Thanks for sharing that with all of us.
i found a nice system
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OMG! This just happened to me on the aus/usd. I saw that it was exhausted and put in a buy order; however, it ran 15 pips below and took me out. Of course it could have been interbank “seeing” my stop loss and taking me out of the trade. I need to change brokers. Thank you for the post.
A new robot coming out in December 2009 called 4xGreed gonna be hot. They are only releasing 1000 copies.. Live stats also posted for your review.
You are the best. I learned alot from your short videos. Thank you and keep up the good work.
Mike
put the stop loss too tight is not a good strategy neither..In a channel you can easily trade buy half/sell half and you still better off making money whilst the market get a new trend…the graph you chose is only a good fit for our comment, not a true reflection of the market though
Hi Dave. I just watch your video #39, 30% expectation… If you can raise millions & can handle the stress to trade/manage other people money, you can make a good living. However, if you trade only your own $, 30% will make a good living ?! THanks.
Hi Dave. Good to have stop loss order/alert but what if there is gap down/gapup ( for swing/position traders) or price move dramastically fast& your stop loss limit orders being skipped (for day traders) ?!!
Dave I am an option trader. And if I am not mistaken you guys trade money. but these videos helped me alot and I still watch them at least once every two months. God bless you for all the hard work man.
Hey Laton,
I know some people who successfully trade with indicators, but I think they rely heavily on price action and just use the indicators as a supplement.
I agree though no need for them for my trading style.
-Brendan
yeah my friend, the best thing is price action, because the indicators give the information so late. I trade price action on gbp/usd. i make 200pips/wk. But i do not sell my strategy.
Hey laton,
I also don’t trade with indicators. Some people like them for longer time frame trading however.
-Brendan
all the indicators are useless. i do not use them.
Thanks I’m glad you enjoy it!
-Brendan
great stuff !
KEYNES WAS A FOOOOL
I wouldn’t have considered the resistance line up there due to that gap on the left before it began…the gap shows instability in the new or false support line -& I think that is where traders get a false sense of security for that type of move-GOOD JOB on videos!
If you spend hundreds of hours and thousands of dollars designing a website, you will “loose” out if you don’t bother to check your spelling.
The second you buy, you also have to have a sell strategy put in place. If you do not, your emotion will move you to react badly. Hope and fear will play into things.
This guy is the best! 99% of everyone on youtube is just trying to turn a quick buck. Most of them provide zero content in their overpriced trading courses. Just a bunch of hype. This guy is providing a superhighway of free information. Keep it up David!!!
Could this hypothetical trader have used things like stochastics and the like to foresee the break of the support?
Perhaps the better way to fix the problem of getting stopped out just before the stock bounces off support would be to lower the stop a little bit, instead of eliminating it.
Maybe, put the stop at 1.5% to 2% below the support line.
How can I avoid playing on support and resistance?…thats what I have been learning from other traders……