Three is a magic number. But it can also be tragic in terms of these three:
1 Revenge Trades
2 FOMO trades
3 Last shot trades
Individually or combined the above can seriously damage your capital and will eventually lead to a blown account. Beware at all times these three witches where fair is foul and foul is fair :)
1 Revenge Trading
This is perhaps the single most damaging type of trade that any trader can fall into. It is destructive not only to your financial capital but also to your emotional capital. The chances of it happening to you are probably inevitable. Its what you take away from the experience that matters.
So what is a revenge trade? In reality it can be any type of trade that you enter into that either in part or as a whole is initiated by emotion rather than analysis with a view of retracing your (usually imprecise) steps. A trade where the aim is to get back to your comfort zone quickly to undo either a valid loss or some previous poor trading decision in a way that does not stick to your planned trade methodology because you have basically screwed up and you know it.
There are quite a few scenarios where revenge trading rears its ugly head but we will take just one example. We might call this the over confident example.
Lets say you start out the day in a positive mind-frame, you are looking forward to the trading day ahead and you have a plan. You may even be (in fact you probably are) on a winning streak with a steadily growing account and feeling pretty confident that you have finally set off on your trading career. Up to now you have been sticking to your rules on money management, trade size, entry and exit criteria and you know the trades that give you an edge and how to trade them. Things are looking pretty good from where you are right now and the road ahead, if not paved with gold, is certainly sparkling more than it did. So far so good - sticking to your plan is the way ahead from here. But the second you start thinking - "right I've proven that my methodology works, its time to put some weight behind my trades and increase my size as I might as well make some real money" it starts to go drastically wrong. Right from the off you are behind the 8 ball and using the wrong mental approach, your emotion is getting the better of you and the sad thing is - you probably know it!
However, you still take the trade with bigger size than normal because your emotion is in charge and not your clear thinking trader brain. And then.... it starts to move against you (wow how can that happen ??) but instead of thinking about cutting and limiting your risk you start to think of moving your stop. Even though you know this is exactly the wrong thing to do and can only compound your bad decision making at the outset - you still do it. And then, inevitably and most likely before you know it, you´re out at a bigger loss level and at bigger size - two hits for the price of one.
At this moment you are probably thinking - shit - what have I done and why the f**k did i do it!. But... rather than taking a few deep breaths and thinking - I know I allowed myself to break my rules and I know the only thing I should do now is get back to my plan - the only thing in your mind is to reverse the situation as quickly as possible for the purely emotional reason of feeling less like a dickhead. Instead of listening to your trader mind which is madly flashing red warning signals (which lets face it you can see clearly for yourself) you still allow your emotions to take over because all you want now is to get back to the point you set off from then you can tell yourself all is ok - I got out of that one and I´ll never do that again.
So in your anger and frustration you do the same thing again - bigger size based on your need to get back to your comfort zone asap and ..... well, we all know the outcome - another loser!. Your anger and frustration has won the day and you are in a bigger hole than before. Sound familiar lol? Perhaps the only saving grace is that you are not alone, we´ve all been there or done something similarly stupid and self destructive based on some type of revenge because of our human need to try and protect ourselves and feel ´safe´ and frankly less dumb.
So whats the answer, how do we make sure this never happens to us? After all, we´ve heard this time and time again so surely there has to be something we can all do to not fall head long into this trap. Well....I´m not sure there is much you can do if I am honest, at least not until you have actually been in the situation for your self and experienced the dread of feeling like a complete and utter dipstick. When I started to write this piece I had in mind to come up with a set of actions you can take to make sure you never have to be in this situation but as I write and think about it and recall conversations with others, the more I suspect there is little anyone can do in advance to head you off at the pass.
I have a sneaking feeling its an inevitable part of the learning cycle, that it is actually something you must endure to eventually come out the other side, stronger, fitter and wiser. So rather than give you a set of steps to take before it happens I think you´ll learn more about yourself if you do go through it. I am obviously not saying purposely put yourself at risk like this but as long as you learn from your mistakes, you´ll be ok and that´s all that matters. If it happens once - ok no worries; twice, you need to have a strong word with yourself. If it happen a third time - maybe consider a different career because honestly, this is an easy habit to break - and if you cant ....!
2 FOMO Trading
The Fear Of Missing Out is a well entrenched human characteristic in all walks and aspects of life. We all like to be in on the know and hate the feeling of not being at the party. In my experience FOMO trading it is best summed up by taking a trade that somehow breaks your rules, usually either because the current price action is screaming ´get in now´ and you just ´have to get in´ or because you´ve have your head turned by listening to someone else. Both are wrong headed and both need expunging from your trading.
The first scenario is one that lures inexperienced traders into traps in many ways. For example how often do you see a set of economic data released or heard it on your squawk box which to every right minded person suggests quite clearly an up or down move. Where the price starts moving in the direction you expect only for it to start reversing once it has trapped all the early adopter FOMO traders. Often I hear you say, but I bet at the same time many of you have jumped in head first on the announcement, taken the hits and had to pick up the pieces later? Fear of missing out has many faces (and many voices especially on squawk where the inflection had a slightly excited pitch!) with data being a great way to induce it so beware ´fake news´ as is the current parlance:)
Similarly, you may have been at the charts all day, can see the price action on your screens and had a feeling that you knew it was going to do that all the time but you didn´t take the right trade at the correct time in accordance with your risk management rules and are now feeling that you have missed the boat. So to get back in sync with the move you allow yourself to take the trade at a worse price at the wrong time outside of your risk parameters in the hope of dragging yourself back on board. And then what - you are left trying to figure out where to put your stop, where you might take some partial profit and how much retracement are you prepared to live with while others take some short term profit on the move. Basically whether or not you have the balls to take the drawdown you probably know all too well is likely to occur on longer term moves. And you have put yourself in this position all because you don´t want to miss the move that if you had been thinking clearly you would have taken earlier. The thing is - wait for a better entry to get on board - its that simple. Trades are like buses - there will be another one along soon enough.
If you have not fallen foul of either of these two scenarios how often have you been swayed by some twitter trader / analyst / talking head stating that this is what is likely to happen and because you believe they must know more than you, you have abandoned your rules and plans and jumped the fence to be in with the in crowd? A fair few times I will wager. However whether they are right or not is irrelevant because the chances of you making any money on their trades or ideas is slim to the point of non existent. You have no idea of their risk parameters, time frame, size conditions or trading methods or style to be able to do what they do. You have to be independently minded and follow your own path - there is no other way to make it in this game. Following the crowd is a sure fire way to burning up your account. Better to miss the boat than go down with it.
FOMO trades are down to you not following your rules and probably having too little confidence and discipline in your own abilities and ideas. Whats the remedy? Stay well away from would´ve, should´ve, could´ve trades, listen only to yourself and stick to your rules. Discipline is everything. Spare the rod - spoil the trader!
3 Last Shot Trades
The third and final sinner in our triad of foul trades is the one we should rightfully end with as it is the one that always comes at the end of the day. The one that usually closes the trading day on a sour note for those that take it. The one that you know full well is not much more than a gamblers bet with even odds. The last ditch try or the hope and prayer trade we have all taken in the hope that it will turn a poor or quiet day in to one that answers our prayers.
Last shots as the title suggests are those trades taken when we might have been distracted or otherwise engaged during the trading session and we desperately want to take something, anything in fact to close out the session on a winner to make up for the lost opportunity we´ve not had the chance or (most likely) the inclination to take. You know the one, the usdjpy that has been falling steadily during the US session so its going to continue going down in asia right or the eurusd that has been meandering around a level that looks supportive so its just going to bounce into the close - you just know it.
What´s to lose, you have spent all day not taking trades for whatever reason so to try and make up for lost time you want to get one in the bag late doors. So here goes....enter, stops set, target - yeah about there... and ..... well what happens next is not the point. The point is the mindset at the start or the reasoning behind this trade is what is wrong.
Why would you want to take a risk on a part of the day that you know lacks volume, has an increased risk of widening spreads and runs the risk of profit taking and turning during the next session. Its not a normal bad habit of experienced traders but there are always reasons for wanting to be in the market and whilst inexperienced traders are the usual suspects here - its worth a note for all of us to make sure we save our hard earned capital for better times rather than waste it when there is nothing reasonably to be gained. I suppose I should say this doesn't apply equally to all trading styles, swing traders may well be quite happy entering at odd times in the market but for day traders - it needs excising.
That´s it - the three trading bad habits we have all fallen into at some point and my take on the reasoning behind them. Revenge trading in my book is by far the most damaging and also the one that needs to be truly stamped out before it wrecks your financial and emotional capital. FOMO and Last shot trades are in many ways more easily dealt with by exercising discipline and control. Knowing yourself and being honest with your rationale for any trade is the key to all successful trading but especially so with these three tragic examples.