Common New FOREX Trader Mistakes: Respect the Diagnostics

An important component of your trade plan is diagnostics. This is the feedback loop from your performance. By monitoring performance on a regular basis, you can determine if you are staying well within the parameters of your plan, or straying off to the side of the road. Remember, leverage is high in FOREX. Small mistakes are magnified -- quickly. A rut can turn into a ditch into a cliff in minutes. Perhaps even more importantly, by doing reviews, you can get a big picture of things and identify elements and areas you can tweak for greater success.

In mentoring students I have found two interesting phenomena, both quite common:

  1. New traders tend to make too much of each trade.
    That is, they attempt to draw universal conclusions from one loss or one win. "This S/L always loses!" Or, "This formation is the best of all!" The human mind wants to generalize; it wants rules and certainty. But, alas, a sample of 1 or 10 or even 50 is often not enough to do the job properly.
Tip: Make small evolutionary changes, not large revolutionary ones. Respect the market process and your plan for it. Think tweak. Do not take a hatchet to your trading method if you have not at least attempted surgery with a scalpel first. This brings up the second phenomenon. Processes do not like invasive activity.
  1. New traders generally fail to realize that small changes to a trading plan can, indeed, make large changes to the bottom line. I mentioned earlier that many traders find the difference between winning and losing to be right between three winners per 10 and four winners per 10. What if you could find a tweak that would turn 1 loser out of 10 into a winner? Or, if you could find a jiggle that turns 1 small winner in 10 to a large winner? In the Goodman Method, this might be simply letting an over go TTL.

Consider this series of 10 trades.

This is from one of my students' trade campaigns. It is a losing series. She has three winners and seven losers. Except for trade seven, the profit-loss ratio was very good. Clearly, trade seven was the difference. When she went back and compared the tracking log, continuation chart, and campaign worksheet, the problem and the solution were easy. On trade seven she lowered her stop not once but twice. She was sure this was a good setup and did not want to miss it. Instead of losing 50 pips, she lost 165 pips. That was all it took to change the bottom line on the series of trades.

Tip: I recommend doing a very quick review after every trade or at least after every session, if it included a closed trade. A mark on your continuation chart or a one-line note in your diary is all you need if you see something you want to study later about the trade.

Do a diagnostic every 10 trades. Do another one every 30 trades and dig even deeper. A day trader may divide his 30-trade campaign into three smaller subcampaigns along the lines of Table below.

[caption id="attachment_13262" align="aligncenter" width="395"]Subcampaigns Subcampaigns[/caption]

Sometimes, it is not so simple. But a little objective Sherlock Holmes work can be very effective! Here are some of the clues you may consider when doing a diagnostic.

There are many other factors to consider. I am sure you have already thought of others. The goal is to find those hidden areas where you can make a small adjustment to your plan, and a big adjustment to your bottom line.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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