Today’s traders are gamblers that have the privilege of not being called a gambler. Why? Because their trading charts make them look intelligent.
Here’s the harsh reality: You can fool other people, not your trading results.
Your trading activity determines if you’re a trader or a gambler pretending to be one.
To avoid the gambling group, you have to know why people are ending up there in the first place.
Below, we’ve laid out four pitfalls and how avoiding them would help disqualify you from the majority losing money in the markets:
1: Flimsy Trading Strategies
Most strategies don’t have a backbone.
Meaning they’re not specific and have no structure. Traders often have subjective strategies where they variate their entries and exits — here’s why it’s a crisis:
Subjective strategies lead to random results.
You might win a few trades here and there, but they’re only short-term highs that distract you from the bigger picture.
In fact, the goal of trading isn’t actually to win a trade. It’s to be consistent.
It takes no skill to win a trade, but to become consistent is legendary. Consistent actions are required to figure out if you’ll be profitable long-term. Taking the same trades over a series of setups ultimately decides if a strategy is working.
Trading and running a business are no different.
Building revenue requires systemising something that’s working. A successful business owner has to run a marketing ad campaign to know if it’s effective. They can’t just go off how one person reacted. They judge how the majority responds.
Anyway, many traders constantly alter their strategies because of how their previous trades went. Especially the losses. Modifying your strategy leads to random actions which keep you in limbo because they mess up your statistics.
Knowing your average profit (average of earnings and losses) and your profit factor is key to understanding if you’re a long-term winner.
Flimsy trading strategies can’t give you this.
2: Backtesting Strategies With a Bias
Scenario: You found a new strategy that you believe has a high win rate.
You want to backtest it to validate whether it’s legit or not.
You backtest several setups, and it’s constant wins.
Then you come across a setup where your take profit makes you miss out on a win by a few pips. Right after, you say, “if the price went there, I would have market-closed the trade”.
Now you come across a setup where it’s a loss and say, “I probably wouldn’t have taken that trade”.
You finally trade the markets with that strategy, and things aren’t happening as you envisioned. Your backtesting bias just isn’t in sync with the market.
You’ve now developed tendencies to miss setups in fear of a loss and exit trades early in fear of the price reversing. What have you got now?
A flimsy trading strategy. You begin predicting the next trade’s outcome to achieve comfort.
News flash: Profit lies in the discomfort zone.
Backtesting without bias gives you the confidence to approach setups, despite how you feel things would turn out.
3: Not Stress Testing Your Strategies
Stress testing is just like backtesting, but it considers extreme market conditions.
Most traders don’t have an answer backed by statistics to decide whether they should trade during a hyper volatile market — this can lead to giving up on a strategy or even blowing your account.
The markets are never guaranteed to operate smoothly. Crazy news can come in an instant and make the markets behave radically.
Being aware of how your strategies would be affected by adversarial market conditions is key to avoiding unexpected issues. And losses.
4: Taking Other People’s Word To Know If a Strategy Works
Are you willing to lose money to find out if someone else’s strategy works?
For most traders, it’s a no.
That’s why using hearsay strategies is problematic. It provokes diminishing belief in a system when losses come and then traps you into the losing game of constantly altering your plan.
To trade a strategy requires confidence, which comes from competence in the markets or backtesting.
It takes belief to go through 50 or more trades with the same strategy and substantial money on the line.
Having proof of a working strategy is the only way to be truly confident as a trader.
Outwit These 4 Pitfalls With TradrLab’s Instant Strategy Verification Tools
TradrLab will:
- Instantly backtest your trades and remove all biases
- Provide analytical insight into your strategies so you spot more opportunities
- Help you create strategies with a visual strategy builder
- Network you with other traders so you can work on strategies together
TradrLab shortcuts the time-consuming labour required to develop profitable trading strategies. It immerses you in a digital environment where only data-driven decisions are permitted.
To understand more on TradrLab, click here.
Soon you’ll be able to experience this through our beta.
Sign up below for instant access when it’s released.