The Most Common of All Trading Errors

May 27, 2021

Mark Douglas #6 

A common error among unsuccessful traders, and that is usually why they are unsuccessful, is that they go through the exercise of convincing themselves that they are right before they get into a trade because the alternative (being wrong) is simply unacceptable to them. 

They just don’t like being wrong. Mark Douglas tells us that as a result, being wrong on any given trade has the potential to be associated with any (or every) other experience in a trader’s life where he has been wrong. If you let emotions control your decision, you risk experiencing that any trade can bring you into the accumulated pain of every time you have been wrong in your life. 

The most common of all trading errors is not defining the risk before getting into a trade. This starts the whole process of trading from an inappropriate perspective. In the light of the fact that anything can happen, wouldn’t it make sense to decide beforehand and thus before executing a trade what the market has to look, sound, or feel like to tell you your edge isn’t working?  

Based on Mark’s work, the following question arises “why doesn’t the typical trader protect himself by ensuring proper risk management every single time? Asking himself or herself if the current market conditions are suitable for their edge?.  

Another framing I would like to add to this is “what reasons or indications do I have to not get into the trade?”. Flipping it around and be critical to your own process can help you with your money and risk management.  

The typical trader won’t predefine the risk of each trade before getting into a trade, because he simply does not believe it is necessary. Mark explains the typical trader believes “it isn’t necessary” because he believes he knows what is going to happen next. The reason he believes he knows what is going to happen next is because he won’t get into a trade until he is convinced that he is right. At the point where he is convinced the trade will be a winner, it is no longer necessary to define a risk. He is right, so there is no risk.  

For traders that have learned to think in probabilities, there is no such dilemma in convincing themselves. Predefining the risk doesn’t pose a problem at all for these traders because they don’t trade from a perspective that they are most likely right or wrong. They have learned that trading doesn’t have anything to do with being right or wrong on each individual trade. As a result, they don’t perceive the risks of trading in the same way the typical trader does. When you accept in advance of an event, that you don’t know how it will turn out, that acceptance has the effect of keeping your expectations neutral and open-ended. 

According to Douglas, the source of trouble for typical traders is the following. Any expectation about the market’s behaviour that is specific, well-defined, or rigid – instead of being neutral and open-ended – is unrealistic and potentially damaging. These expectations are the reason for many losses and making many unsuccessful traders.  

Our expectations come from what we know, and we create an expectation when we decide or believe we know something. The expectation is created because we naturally expect it to be right.  

When we hold an expectation, we are no longer in a neutral or open state of mind, and it is not difficult to understand why. Our pain-avoidance mechanisms will shield us from information that doesn’t confirm what we expect (to keep us from feeling bad). Douglas reminds us that our minds are simply designed to help us avoid pain, both physical and emotional.  

Our pain-avoidance mechanisms exist at both conscious and subconscious levels. To avoid pain, we can narrow our focus of attention and concentrate on information that keeps us out of pain.  

This is important because beginner traders may fall prey to our pain-avoidance mechanisms which block our ability to define and interpret what the market is doing and which opportunities it presents to us. Unsuccessful traders have a tendency to see trends that don’t appear from real market conditions, but rather are created as a result of their ability to perceive a given trend or condition exists 

Only when we are out of the trade, we can see the market in clarity again

Image by Karolina Grabowska from Pixabay 

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