The Four Biggest Trading Challenges

People have issues with trading for four main reasons:

1.They trade the same setup in every market expecting similar results. Markets don’t work that way. Markets change all the time. Different setups work in different markets. For example, breakouts work amazingly during rising markets, but they will lose you money during range-bound, choppy and corrective markets. When your bread and butter setup stops working, you have two options – find a setup that works or sit on the sidelines until market conditions come back in your favor.

2. They expect to be right almost all the time. This doesn’t happen, even in a bull market. Having a 50% success rate is a very good hit rate. Think about that. If you can be profitable only 50% of the time, how big should your losses and gains be in order to achieve great returns? Not taking a small loss and letting it turn into a big loss has many consequences. The impact on the mind can be even worse than the impact on your account. A big loss influences your future position sizing – you trade small when you have to trade bigger because you are scared. A big drawdown can impact your objectivity and ability to spot and take great setups.

3. They expect regular income from trading. It doesn’t work this way.  Periods of making a lot of money are followed by periods of making no money and periods of losing money. The goal is to keep losses to a minimum and be aggressive only during the right circumstances. Twenty percent of your trades will account for most of your profits. The rest should be small wins and losses that cancel each other out.

4. They trade too big. Most aspiring traders are undercapitalized and they want to get rich quickly. This leads to trading too big, putting all of your money in one small-cap stock, trading illiquid penny stocks, trading options directionally. To sum things up, they trade crappy stocks with a lot of leverage and then they get wiped out quickly.

George Soros and Stanley Druckenmiller became famous for putting 50% or more of their capital into a single position. People assume that they can trade like Soros and Druckenmiller and this is a huge mistake. Never put yourself in a situation where a small market move could shake you out of a perfectly good position just because your sizing was too big. Never let a trade impact your sleep and overall happiness. You don’t want to be in a position where you own two stocks and they are the only two that are not moving with the rest of the market. You should never put more than 20% of your capital into a single stock.

Check out my newest book: Top 10 Trading Setups: How to Find them, When to Trade them, How to Make Money with them