Trading is the hardest “easy money” you’ll ever make. In fact, less than 5% of traders who begin trading go on to become consistently profitable over the long run. However, how do you know if you’re in the 95% who lose, or the 5% who win?

Not everything that is worth doing is going to start off easy either. So what if you’re a 5-percenter, who is going through a rough patch? I don’t know what would be worse than quitting on something you really have a knack for. But then again, when should you stop the bleeding if you’re really not cut out for trading?

Trading Too Big

Just because you can trade 1 Futures Contract for every $500 in your account does not mean you should. I’ve talked about this in many articles, but your Risk of Ruin is too high for you to trade with so little margin and such high leverage.

Here’s an article that explains what I mean in more detail. Here’s a quick example though. If the E-Mini S&P 500 Futures have a notional value of $130,000, and you’re using $500 in margin to trade 1 contract, you’re leveraging yourself 260x.

That means that every 1% move in the E-Mini S&P 500 Futures will reflect in a 260% gain or loss in your account, if you’re fully invested with that $500.

I don’t know about you, but I don’t like those odds.

Averaging Losers

In the wise words of Paul Tudor Jones, “Losers average losers”. We’re all guilty of this at some point in our trading careers. For those of you who don’t know what averaging losers is, here’s a brief overview.

Averaging losers is when you have a trade that has moved against you. Rather than getting out of the trade and cutting your losses, you decide to add to the trade. People who do this are in the mindset that it will allow them to lower their basis (the cost at which the entered the trade). However, you’re substantially increasing your risk by doing this, because the market doesn’t have to do what you want. It can keep moving against you into perpetuity.

Averaging losers is a terrible thing to have in your trading plan, and a terrible habit that must be broken if it’s ever formed.

There are cases where averaging your trades (i.e. dollar-cost averaging) is a viable strategy. However, for most traders who trade on a shorter timeframe and employ the use of leverage, averaging your losing trades is just another way to increase your Risk of Ruin.

Overtrading

Fire, aim, ready. Actually, it’s more like “spray and pray”, if you will. Now, I’ll be the first to say that if you’re taking 1,000 trades a day and consistently profiting from that, I see no issue with it. Whatever your style, as long as it’s consistently profitable, is perfectly fine.

However most people trade too big and arbitrarily take trades, with no reason for taking them, and get chopped up in the process. That’s where people screw up. They take massive amounts of trades with no reason for taking them in the first place.

Any trade that has sound reasoning and risk management behind it is a viable trade, in my opinion. Firing off trade after trade, reversing from long to short in a matter of a few second over and over again will most likely destroy your account.

Not Respecting Trade Location

Trade location is the single most important risk-management tool you could ever have, in my opinion. If you’re right on the direction, but get in at a bad price, it doesn’t matter. You expose yourself to more risk than is needed by doing business at bad prices.

Trade location, for those of you who aren’t aware of the term, is the concept of initiating a trade at a price where you think the market might pause and possible reverse. It isn’t like picking tops and bottoms, though you certainly do have great trade location if you catch a top or a bottom.

To say you have good trade location means that you have initiated a trade at a spot where you think the odds of being profitable are skewed in your favor, and if you’re wrong your downside is small. It also means that if you’re wrong, an adverse price move against your price zone will let you know quickly that you are wrong.

By initiating trades at bad prices (like in the middle of a trading range), you not only are going to be sweating bullets getting chopped up, but you have no structural price level at which you know you’re wrong for certain.

Another issue that many traders face is that they trade the chart, rather than price. Often times, you’ll have some dumb technical trading “signal” that says you should initiate a trade. By the time you get the “signal”, the trade location that you could have had prior to the “signal” is gone, and you’re now taking more risk than before.

As the saying goes, “Confirmation is for Catholics”.

Don’t Have A Plan

When I first began trading, I was always confused at what it meant to have a trading plan. “How can you know at exactly what prices to buy and sell ahead of time, to where you can plan ahead?”, I used to think. It wasn’t until much later that I realized that is not what it means to have a trading plan.

A trading plan is essentially writing down how you are going to manage your risk. Things like position sizing, profit targets, and stop losses are what’s included in a trade plan. In other words, it’s not predetermined price levels, but what how you’re going to react when price gets to a certain level.

Even the best traders in the world, who just seem like they’re shooting from the hip, have a plan.

Gambling Instead of Trading

What happens in Vegas…

This one really grinds my gears. You get a guy (or a girl) who thinks they’re the next Jesse Livermore, who thinks they’re going to turn $10,000 into $1 million in a month, only to blow out their account by trading too big, averaging their losers, overtrading, not having a plan, and not respecting trade location.

Then they go on to tell anyone and everyone that the system is rigged, that they’re the victims of some evil bankers behind closed doors (which may or may not be true, but probably isn’t).

It’s these people who give trading a bad name. It’s these people who the sensationalists latch onto (sensationalists who have never traded in their life) and profess to everyone else that trading is gambling. They say, “Long-term investing is what wise, educated people do. Invest in a stock and don’t ever touch it again. Anyone who thinks they can beat the market is a fool”.

Really? Then how is it that there are people who do consistently beat the market by playing the short-term game? While no one should ever confuse impossible with improbable, there are things you can do to help tip the scale in your favor. One of them is to get educated about the market.

As you can see, I don’t agree with these people. Play with fire, and you’re likely to get burned. Or learn not to play with fire, and instead learn to work with fire to your advantage.

Simple Doesn’t Mean Easy

Look, these are all very simple and straightforward things to understand. However, just because it’s simple doesn’t mean it’s easy. These are habits that you must develop over time (read: not overnight). There are a few ways that you can shortcut your efforts. However, what you do is your decision.

It’s those that can master their emotions, maintain their self-control, and manage risk effectively that are in the top 5% of traders.

I hope you found this article to be of use in more ways than one. If you found any benefit from this, please let us know in the comment section below. Thanks for reading.