You’ve just come off of a string of losing trades. You’re thinking to yourself, “What the hell am I doing wrong?”, while questioning whether or not this whole trading thing is worth it. It’s understandable. This game is hard. Most people quit due to the stress and worry, or they blow out of their account and never come back.

Honestly, the failures that you’ve been facing aren’t quite your fault alone. This way of making money is a trial by fire. There’s not really a great way to get over the initial learning curve. Most never do.

Did you know that success is 80% mental and only 20% skills? That makes sense. I’m sure you know a lot of booksmart people who can’t fight their way out of a paper bag.

Most people never sit down to think reflect on the things they’re doing right and the things that they’re doing wrong. Most people don’t look inwardly. The very fact that you’re reading this article shows that you’re a reflective person, and that you’re actively seeking to improve yourself.

Here are the top trading mistakes that most people never realize.

The Tactical – The 20%

Some of you are struggling with the tactical and strategic abilities. This article will be split into two parts: the first part on the tactical mistakes, and the second part on the mental mistakes.

Much of the mental discussion is based on personal experience as well as from Way of The Turtle. The book is written by Curtis Faith, one of Richard Dennis’s Turtle Traders. It’s not the be-all and end-all, but book is great and highly recommended.

Improbable Profit Targets

How many times have you had a winning trade turn into a loser? How many times has a trade started off as a winner, but you got greedy and wanted more only to have the trade turn into a big loser?

In cases like this, you probably feel like NBC got the theme of The Biggest Loser wrong. Overweight people aren’t the biggest loser, its people who don’t take their profits off the table when they have them.

Within each timeframe there is a probabilistic range that what you’re trading is likely to stay within. The higher the timeframe, the higher the odds that your larger profits targets will be hit. For instance, if you’re trading on a 5 minute timeframe, and looking for 20 point targets in the /ES, the probability of you making that on that short timeframe is very low.

However, if you were to expand your timeframe to a daily or weekly timeframe, the odds that you make 20 points on 1 trade in the /ES increase substantially.

How do you know what profit targets are probable? You can use this tool to help you make that decision.

Too Much Leverage

Have you ever heard of Risk of Ruin? It’s basically the probability of you losing your account when considering the amount of risk you are taking, along with your win rate. The lower the win rate and the higher the risk you take on each trade, the higher the odds that your account will blow up. There is a mathematical point of no return, at which you’ve dug yourself too big a hole to get out of.

One of the easiest ways to lower your Risk of Ruin is to lower your leverage. You can skim through this article to gain a better perspective on what might be a reasonable amount of leverage for you.

Random Trade Location

We’ve already established that within each timeframe there’s a probable range that an asset is likely to trade in. Whether the timeframe is trending or rotating, it’s likely to not deviate much from its expected range.

If you think of the range as a version of a Distribution Curve, this is likely to make much more sense. There’s no cut-and-dry answers in trading, so just have a little imagination here. The goal is to make your trades around the extremes of the timeframe you’re trading.

If you’re trading on a daily timeframe, often times the range will be set within the first few hours of the day. The prior day’s high and low are also good levels to imagine price extremes.

Taking calculated trades in these zones can increase your probability of profiting on your trades. Taking trades in the middle of the Distribution Curve can be devastating, because it’s in this zone that people are likely to get chopped up the most.

The Mental – The 80%

The mental discussion here is based a lot on the cognitive biases that every human inherently has. The first 8 in the list below come straight from Way of The Turtle, and all credit is due to Curtis Faith. The rest come from my own experiences and reflections about those experiences.

It should be noted that you can use the recognition of these cognitive biases to your advantage in 2 key ways. The first way is that you can recognize them in yourself and take steps towards mitigating the risks associated with them. This will not only aid in protecting your downside, but your upside will likely benefit as well.

The second way is that you can recognize these biases in other market participants, and press them. What do I mean by this? I mean that the market is made up by people who are just like you, with their own faults and biases. Learning to recognize these human errors in others can provide you with an extra edge, by the mere fact that you know the likely outcome in this game of psychological chess.

That second reason might sound very devious. Whatever your opinion on morality, human nature is human nature.

Loss Aversion

When presented with the choice of gaining or losing something, people will naturally tend to choose avoiding a loss of something. This psychological bias was first uncovered by Daniel Kahneman (author of Thinking Fast, and Slow) and his partner Amos Tversky.

I believe that loss aversion can be applied to both losing money in a trade, or missing a trade entirely. For example, a trend follower who has missed the majority of the move is likely to feel anxious that he/she is losing out on potential gains, so the person decides to join in on the move (the person chases the trade).

There’s a term in trading that selling usually begets more selling, and vice versa– buying usually begets more buying. People buy and sell for a number of reasons. It is not uncommon that the last portion of a price movement is when the most amount of buying and selling transacts.

On a down move, you have people selling at bad prices and getting short in the hole. On an up move, the last portion involves people getting long at bad prices who are now stepping in because the market has provided them with confirmation.

Confirmation is for Catholics, as they say. Risk management is for winners.

Sunk Cost Effect

Have you ever heard the phrase “Losers average losers”? It’s a term made famous by Paul Tudor Jones. It’s akin to saying that you should not throw good money after bad money. Robert Cialdini would liken this to what he calls the Commitment & Consistency Bias (if you follow the link, it’s bias number 5 labeled “Inconsistency Bias”. It’s funny how psychologists like to rename the same thing 100 times).

Once we make a decision, it’s hard for us to go against what we’ve decided. In the context of trading, people often make the error that they should average down on losing positions. Usually you’re hear it called “dollar cost averaging”. There’s nothing wrong with it per se.

However, if you’re using leverage to trade your positions, throwing good money after bad will get you killed.

It’s best to stay nimble, and not get married to your opinions. As traders, we can only control and manage our risk. We can’t influence the outcomes of our decisions, but we can change our decisions if we’re wrong. Remember, the goal of trading is not to be right, but to make money– consistently.

So, that usually involves an element of being right, but mainly it’s knowing when you’re wrong and acting appropriately.

Disposition Effect

The Disposition Effect is quite similar to the Sunk Cost Effect. All of these biases are somewhat overlapping and related to each other. The Disposition Effect describes how we tend to be reluctant to close out of a position that has gone against us, and are more likely to close out of positions that have moved in our favor for a small gain.

While I would argue that if you’re day trading you should take your profits when you have them, this bias makes more sense when speaking about investors. The emotion that best describes this bias is “hope”.

Outcome Bias

I think Investopedia provides a very succinct definition of the Outcome Bias: “A decision based on the outcome of previous events without regard to how the past events developed”. In other words, it’s the act of making decisions based on what the outcome was last time, rather than making decisions based on the information that led up to that particular outcome.

An example of this would be Stock tips. One day you hear your friend is making a killing in XYZ stock. Naturally you think that if he’s doing it, so can you. So you invest in XYZ and get run over. In this example, you didn’t do your own research and analysis, but rather relied on someone else’s prior outcome.

Recency Bias

The Recency Bias is akin to what Charlie Munger calls the Availability Bias (bias number 18 in the list). This bias tends to play out when people overweight the importance of recent events. They say that the best trades tend to fly in the face of the most recent market activity– you can thank your brain for that.

A macro example of this would be what most people go through in their lives. People tend to forget that what goes on in the world isn’t the first time things have happened. I’m sure you’ve heard the quote by Mark Twain, “History doesn’t repeat itself, but it often rhymes”.


There’s a lot of information that has been written about Anchoring. Here’s a video that explains it nicely.

Bandwagon Effect

This one is pretty self-explanatory. “Everyone’s doing it, so I should do it too”. If you go back up and revisit our discussion on bad trade location, you’ll understand that just because everyone else is doing it doesn’t mean you should. Often times, when someone makes a trade because everyone else is, you’ll sacrifice good trade location by chasing the trade.

Trade location is the best risk management tool you have. Use it effectively, and it will help you immensely. If you’ve missed a trade, don’t feel bad. The market holds endless opportunity. Forcing trades, or hopping on the bandwagon increases your risk.

Belief In The Law Of Small Numbers

You need to have a large data set to draw any statistical conclusions about things. For example, let’s say your last 5 trades were winning trades. This does not mean that your trading system/methodology is successful 100% of the time. Why? You only have 5 data points.

In order to make assumptions off of your previous history and have reliable data, you need to be basing decisions off of larger sample sets.

In Summary

Okay, my ratio of tactical to mental tips wasn’t exactly 80/20. But you get the point. There’s a lot you can reflect on that is under the surface of your trading and deeply personal, that can help increase your odds of making money trading.

I hope this article was eye-opening and helpful. Let us know what you think in the comments below! Thanks for reading.