Just what is a Trading Mistake?

Recently I read an article that attributed losses to trading errors. I didn't think much of it until I started to try to define what was a trading error. By expanding the definition (at least for me) I have been able to improve my trading:

I had thought of mistakes as being:

1. Trading impulsively/emotionally (not following a plan)
2. Entering a trade at a price outside the plan's range.
3. Errors in order entry, software etc.
4. Usual list of not using stops, too much size etc...

Now I have expanded the list to include:
5. Not taking an entry that your setup indicates should be taken.
6. Not following your system's money management rules.

I long ago proved to myself that I have no ability to "pre-determine" if a rade setup is more or less likely to win or lose. Gorget it. Let the market decide. After all that's what is meant by a trade setup. BUT I never considered NOT TAKING AN ENTRY as a MISTAKE.

By including 5 and 6 I am forcing myself to take every valid signal and follow my MM rules or I HAVE TO LIST IT AS A MISTAKE in my trading journal.

What mistakes or errors occur in your trading that you need to get rid of?

bakrob99, 5 of your 6 mistakes are "not following your plan/rules." The other (#3) is not a mistake if the software/hardware let you down in a manner that you could not prevent but obviously is if you didn't double/triple check your entry which could be included in your plan and goes back to the following your rules/plan.

DT you're right ... but I guess my point is that not taking a setup was not something I had considered as a mistake ... but looking at my end of day analysis it becomes clear that it is the biggest of them all. (:-->()

This is true. This is also a big problem with back tested systems or mechanical systems that have proved to be profitable. They rely on the fact that you execute each and every trade. If you're sick or on vacation then an individual or independent trader can't do that. The solutions are to trade in a team or group or company or to have an unattended system mechanically execute the trades. Obviously the system can break down and the more safe guards you put in place the more expensive it becomes.

There is actually a way to test the impact of mistakes on a mechanical trading system. If you can categorize your mistakes like you've done and count how many of each type of mistake you make per 100 trades then you can throw those same mistakes into the back tester at random points with the same frequency that you make them in real life. That would then tell you if your system is still viable if you make that many mistakes while trading it. It might be a profitable system if it were traded perfectly but not if your error level reaches a certain point. i.e. It measures your ability to apply the system and gives you an answer about whether or not you are able to trade the system base on your rule following capability.

not taking valid trade setups is based in the fear of loss.

is being afraid to act on a signal a mistake or error ?

i see this issue as more of a mental limitation than a mistake or error.

in any event, the exercise has helped you to identify the primary issue you will have to overcome in order to continue your growth as a trader... it's your limiting factor.

quote:

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Originally posted by day trading

There is actually a way to test the impact of mistakes on a mechanical trading system. If you can categorize your mistakes like you've done and count how many of each type of mistake you make per 100 trades then you can throw those same mistakes into the back tester at random points with the same frequency that you make them in real life. That would then tell you if your system is still viable if you make that many mistakes while trading it. It might be a profitable system if it were traded perfectly but not if your error level reaches a certain point. i.e. It measures your ability to apply the system and gives you an answer about whether or not you are able to trade the system base on your rule following capability.

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excellent advice

If you really want to complicate it, throw some dynamic behavior into the model... for example, how does your actual real-life trading change when you have one loss, two losses, or three losses in a row... are you able to take that fourth trade after a string of 3 consecutive losses or do you shut down for the day unable to continue ? It is my contention that a string of consecutive losses is where the trader and trading system meet reality.

I remember reading about a product called TraderDNA and I think I mentioned it here on the forum somewhere. Can't remember if it's this product or not but if it is it tries to breakdown how you trade - your trader dna - an analysis of your methods. The whole point is being able to collect enough data about yourself to see how it will impact you trading a profitable system. Khalsa from Khalsa's Pad was telling me that he tried to abstract himself from trading by giving his wife the rules and she would sit upstairs and trade while he would watch and analyze the market downstairs. He said that he couldn't stand it and kept on running upstairs and intervening with his own system and overriding it. I don't recall if he told me if it made him more or less profitable because the topic at the time was his inability to let the system run by itself. This is a while back now...

Hi Guy and fellow traders,

This is always an interesting topic to discuss. I spent many months working until 4am ish developing SYSTEMS. I now have over 130 SYSTEMS and the list is growing still. What I look for is what SYSTEMS have triggered and then use the confluence between then to plan a trade.

My motto is indeed "Plan your trade, trade your plan"

Now to the point. Yes that list above can be considered mistakes, or simply considered lessons. We are all forever learning and one must use mistakes as an education to move on and progress and not make those mistakes again.

I am a scalper by nature and for me the order is simple.

First I need to study and work out an overall plan (bias) for the day. I then need the patience and give it time to see if I get within my entry parameters. Once that happens I must go for it , however it looks.

I then need to see where that trade would be wrong. I also need to make sure at no stage does "GREED" set in and must stick to the plan. GREED KILLS!

If I am happy with the profit I must "HIT AND RUN" and wait for the next trade. If you pick a good entry, then you have a good chance of taking a profit. However a profit is only a profit when taken.

So for me its about STUDY AND PLAN, PATIENCE, ENTRY WITHOUT EMOTION, NO GREED & HIT AND RUN.

Now there are exceptions and the list is growing. It is all very well saying take "entry without emotion" but what does one do on FED DECISION DAYS, FED MINUTE RELEASE DAYS, CPI/PPI DAYS, GDP DAYS, NFP's DAYS etc etc. the list is ever growing with ADP now like yesterday added to the list too?

Well yesterday I had over 90% odds of ES printing a +3 from Tuesdays close. Yet it was down in globex and not getting past 1364 (+2) in RTH.

The FED decision was due at 2.15pm EST and the risk was high.

Yet my study expected high odds of a minimum of 1365 spoos and I had a ROADMAP target of 1370 spoos.

Do I risk playing before FED?

The answer is YES. I have to. For me its a game of odds and the odds were high for the plan. Otherwise the way its rigged nowadays with all those economic reports, earnings season, fed stooges talking daily, subprime news etc. you would never trade.

As it happens the high odds paved the way for a big rally on the FED DECISION before selling off.

Now same with last night. High odds for a -4/-7 and a +3. After close we tanked to a -17 but by the time I awoke this morning (3am EST) it was printing the +3/+5.

So in a nutshell "Plan your trade, trade your plan" and STUDY is absolutely essential to success.

Hope it helps. Regards,

K

As regards my wife trading the SYSTEMS, absolutely 100% right, it worked the best as it was with NO EMOTION.

Problem is my wife now knows the SYSTEMS and thinks like me so that does not work anymore.

One needs a MONKEY TO TRADE as its always human emotion that is the biggest drawback to us traders.

Regards,

K

Thanks Khalsa, much appreciated!

I understand and think that it is quite amusing that human emotions creap in as soon as you "learn something" about the market ... surely a case where ignorance is bliss.