Biggest Trading Mistakes to Avoid – Just Can’t Wait

One of the biggest mistakes new, and not so new, traders tend to make is getting into positions too early because, you just can’t wait. You don’t need to me an expert psychologist to understand the reason for this. You got into trading to make money, preferably quickly and often. Now you’re sitting in front of your computer, starring at charts and itching to add some green to your account.

You’ve got your eye on a particular ticker that has pulled back to VWAP and is trying to bounce but looking very weak, based on your indicators and the price action. It’s still above VWAP, which should, and usually does, act as a major support area, so your trading brain is telling you to wait until it breaks VWAP to consider going short. You’re trading emotions, powered by greed, is telling you something like this: “You know that this ticker is really weak now and will probably drop like a rock any minute now before you will ever be able to get short, and you’ll end up missing this golden move. So you better forget about waiting and go short immediate, even though it’s above VWAP.”

Sound familiar?

The longer you’ve been trading, the more you learn to listen to your rational, trading brain. But when you’re getting started, or when you simply throw out the rule book, you tend to let greed get the better of you. So you go short just above VWAP and you do it with size, in order to make the most money possible when the price plunges.  Your eyes are now glued to the chart, sweating every tick and projecting all your supernatural energy power to make the price plunge. But instead of dropping, it holds VWAP and takes off to the upside!

Horror show!

Now you’re sweating buckets and, instead of cutting your loss,  you wait to see if various moving averages act as resistance and turn the ticker back down. You watch it break above the 8 day moving average, then the 21 and 34 as it makes a bee line for the 89. Finally, it wicks above the 89 and you surrender with way too big of a loss, only to see it then hold the 89 and head back down in your direction. It doesn’t get much more frustrating than that!

Let’s review your mistakes:

1. You got into a short position right above VWAP support.
2. You did so because your greed or overconfidence got the best of you and you just couldn’t wait.

I’ll speak about respecting and ignoring key support levels in various chapters of this book. For now I want to focus on not being able to wait for the right opportunity to take a trade.

Most of your trading time will, or at least should, be spent waiting and watching, like a hunter silently and patiently stalking his prey. You might have to wait and watch for hours, maybe days or weeks, before you spot the setup that your looking for. While you’re waiting, you’ll undoubtedly get antsy and start looking for reasons to get into trades that don’t meet your setup criteria. You’ll start trying to anticipate moves, which you’ll want to get in front of.

The same holds true with anticipating pattern breaks. If you look to identify and trade patterns, you’ll often find yourself monitoring a particular pattern building out. The time needed to complete the pattern depends on the timeframe you’re using, but whatever it is, your greed will be telling you to get in before the pattern break. If you are well versed in pattern recognition, you know if a pattern is bullish or bearish.

For example, let’s say you’re watching a falling wedge pattern develop on SPY. It continues to make lower lows and lower highs, moving down and to the right. Your indicators, and your gut, is telling you that the downward momentum is dying out and your sure that the push pattern is about to break out and power higher. Knowing that a falling wedge is a bullish pattern, you buy some calls to participating in the break that you know must be coming. Sadly, instead of breakout of the wedge to the upside, SPY breaks down through the lower part of the wedge and plunges lower, toasting your same or next day calls.

What could you have done differently? Had you waited for the breakout to actually occur, you would have avoided the call trade. If it had gone in your direction you could have still gotten in on the action, albeit a few ticks later. And yes, if it had rocketed 20 points to the upside in a few seconds, you would have missed the trade and have to wait for the next opportunity. But that’s what risk management is all about.

I can’t tell you how many times I’ve gotten into a position in front of a major support or resistance level because I was just positive that the ticker was going to break above or below the level. Most of these trades have ended up costing me money, sweat and stress. Sure I knew the rule. But as is often the case for newer traders, I let my emotions and greed trump my rational process.

As frustrating and often painful it is to watch trade go against you, it much worse when you know that you took the trade ahead of a support or resistance level. Ouch!

Waiting for a break of a support level is clearly the right way to trade and makes good sense. The reason it’s so tempting to break that rule is because sometimes getting in earlier actually works out and you catch the break. How awesome is it when you bet on that bullish or bearish pattern to break your way and it does! You feel like a master trader, like you can do no wrong. But then you try it a few more times and give back all of your “master trader” gains, and more.

The truth is that every trade you take is ultimate just a 50/50 bet, because no one knows what’s going to happen on the next tick. But the job of trading is about trying to get an edge and move the probabilities slightly in your favor. Respecting support and resistance levels is one of the primary ways traders manage risk and attempt to align probabilities in their favor. So while going short just above support, or long just below resistance, can work out, the probability for that to happen is not with you. In other words, you have no edge in the trade.

Let’s say you feel like throwing the “rules” out and going with your gut on this trade in any case. You can still manage your risk by taking a smaller position than usual. If you would usually trade 300 shares or 5 options contracts, just trade a third of that. That way you still roll the dice but mitigate the fact that you’re breaking the rules and have probability against you. In general, whenever you feel like the odds are not with you but you want to place a bet in any case, make that bet small enough so that if you get it wrong, you won’t hurt too bad, but you’ll still profit if you’re right.

Bottom Line

A fundamental element of successful trading is patience. Jumping the gun on a trade, before it presents you with an edge will lose you money 9 out of 10 times. Taking trades just above or below support and resistance levels or before pattern breaks puts you at a disadvantage and sets you up for failure. Even if you get lucky occasionally, you’ll end up losing in the longer term. So next time you feel like jumping in a step ahead of the game, STOP — take a moment to breathe and consider the risk that you’re about to take on your hard earned money. You want to set yourself up for the greatest chance to succeed, not just place a red or black bet at the roulette table.

If you still want to place a bet with the odds against you, mitigate your risk by reducing your position position, so that if you’re wrong, you don’t get hurt badly. Alternatively, you can place a very tight stop on your position, but depending on the ticker and volatility, that isn’t always practical.

Watch, wait, and when things line up in your favor … trade!