There are literally thousands of traders out there who have brains, motivation, money (but not for long), big computers, trading software, newsletters, trading magazines, courses and more, but who can’t make money. I call them “Johnny and Jane”, because they’re typical and engage in losing behaviors common to so many traders. The sad but true fact is that in spite of all the advances we have made, too many traders still fail. But why? Why is it that “Johnny and Jane Can’t Make Money in the Markets” consistently or successfully? Here are some of my thoughts. I hope they help you in your trading plan. Hopefully you won’t end up like Johnny and Jane or if you’re already a Johnny or a Jane (or both) my thoughts will help you improve your results.
1. The average trader gets too much information
In my talks with traders I have discovered that the typical trader uses the following information sources almost daily or even many times daily: two or three newsletters, two or three newsletter hotlines, brokerage house on line reports and recommendations, CNBC, free on line reports (usually 2 or 3), computerized trading systems, timing indicators (at least three to five of them), a variety of charts, and postings in various trading chatrooms. If you DO NOT use the majority of these “informational sources” then I congratulate you. The simple truth is that the vast majority of these informational sources have no value. All too often they reflect the opinions of other traders and analysts who usually have very little experience or who are merely touting their own points of view. You only need a few sources of information. In fact, if you trade based on mechanical trading systems, then you need NO OTHER source of information. One of the reasons that “Johnny or Jane can’t trade” is that they have TOO MUCH INFORMATION. When it comes to trading information, less is often more. Don’t make the mistakes that so many others make. DECREASE the amount of information you get. REMEMBER that most of the information you get is totally useless. In fact, it’s worse than useless. It can actually help you lose money!
2. Johnny and Jane are victims of common thinking
Common thinking in the markets will get you common results. In fact, common thinking in any aspect of life will get you common results.Common results in the markets are losses. If you want uncommon results then train yourself to become an uncommon, unconventional thinker and trader. Be a contrarian. Question the psychology of the herd. Don’t listen to what most traders are listening to and don’t do what most traders are doing. The logic is VERY SIMPLE. If what most people are doing leads to the common result of losses then what most people do is DEAD WRONG!
3. Over analyzing trades
Most things in the markets are simple. Most moves do not happen by accident. The markets give us very clear clues in advance of moves. I would estimate that about 20% to 40% of market behavior is random. Accordingly, many of the signals or conclusions that you reach from analyzing markets will be incorrect. Some traders believe that the more tools they have in their analytical arsenal, the better will be their trading decisions. This is not correct. The time you spend in analyzing a trade does not improve the odds of success beyond a certain point. If you think that you will do better if you spend more time analyzing your trades then you are wrong. Stop wasting your time and stop fooling yourself.
4. Johnny and Jane love small stop losses
The myth of the small stop loss is another reason for Johnny’s losses. The good news about small stops is that you won’t lose too much money every time you get stopped out. The bad news is that you WILL likely get stopped out almost every time. Johnny and Jane don’t understand that the size of the stop loss must be related to the volatility of the underlying market. A stop loss of $800 may be reasonable for the cocoa market, but it’s not at all reasonable for the full S&P contract.
5. Stop losses should be a function of your trading system and not your pocketbook
By this I mean that the markets have NO RESPECT for what you can afford to lose on a trade.Using a dollar risk stop loss based on how much risk you want to take makes a lot less sense than a stop loss based on market volatility and trading methodology. Think about it!.
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