Trading Success Is Dictated By Behavior http://www.netpicks.com/trading-behavior-success/

Gym owners love the beginning of every year when those with "get in

shape" resolutions come knocking at their membership desks. For a while,

the gym is packed with new and longer term members and it can get

frustrating for those who have made training a lifestyle.

The good thing is that they know it is only a couple of months before many

of the new members just stop coming.

The new members start with good intentions.

They have become educated on different training methods and have laid out a plan to alter their eating habits that are congruent to their

goals.

Some obtain the services of a personal trainer and of course we can't forget

the small fortune they spend on workout clothes.

The majority soon realize that the promise of "easy washboard abs" in 30

days is a myth and that it requires dedication and effort to get any

results. The desire to get in shape and the actual results many obtain are

separated by a huge margin.

In the end, the majority will go back to their old habits and every year will gain about an extra 3-5% of weight. They knew what to do to reach their

goal but failed to act on it in a consistent manner.

They had behavior issues.

Looking at trading, we can see a lot of resemblance to those who give up at the gym and those that blow up their

trading accounts.

New traders flock to forums, course, and often times learn some important trading concepts that may give them a

slight edge in the markets. A slight edge is all you need to make money.

They sit in webinars and buy trading systems that have proven themselves historically and in the current market

environment. Trading platforms are researched as

are brokers and each new trader settles with what fits their budget.

After learning their chosen trading method, understand risk, position

sizing, and have designed a trade plan, they set forth on their trading journey

determined to make their mark.

In the end, the majority of new traders close their accounts and move on.

Most of them had trading behavior

issues.

Is it fair to say that much of your success in trading has to do with

behavior? I think it is.

1. Your trading system. However you approach trading, you have a system or method that you have tested and

has shown to have a small edge in the market. Every variable is accounted for and it is the sum of all the parts that makes the system or method a

successful one.

The problem starts when you start tinkering with things without testing

the change. Netpicks has trading systems that have been fully tested

not only by the developers, but also by those who purchase them.

All systems come with trade plans that are only released once they pass

testing using past data plus forward testing in live markets.

Your entries, stops, and targets are laid out on the chart and these are

calculated from the current action of the market. The trading plans set

forth times to trade and when adjustments are required just to name

a few items.

Look at this chart.

You can see the system printed a trade setup that triggered and went to

target. What if you decided that you were going long right into potential

resistance levels as I have marked (not part of the system) and you have

decided to skip the trade?

What if you continued to add/subtract variables to/from the system that were

based on theory and never tested by you?

Your behavior while trading has taken the statistical edge from the system and you are no longer trading the

original system.

The system clearly worked...but your behavior caused you to miss an easy

trade and as Murphy's Law would have it, perhaps a string of losses is around

the corner. Test your system. Trade your system

and the plan you've laid out.

2. Increased position sizing. Perhaps you just came off of a string of losses. Maybe you skipped too many trades

that turned out to be winners. Whatever the reason is, you choose to

increase your position size to an amount that a handful of losses can

severely damage your trading account.

Greed is real and it does seem simple enough to add on a few contracts.

Even worse, your behavior is rewarded by a large win so you decide to

continue to use a position sizing that won't withstand a run of losses.

Nobody can tell you what to risk as everyone has a different risk tolerance. Every system is different as well. You

have to account for the probability of a string of losses and what percentage

amount per trade will have you weather the storm.

If you are seat of the pants with risk, your behavior of not following

appropriate risk allocation will take you out of business.

3. Letting losers run. Virtually every trading system has a point where the trade is no longer valid and a stop out

takes place.

This next chart shows:

Uptrend Consolidation

Test of low = Entry

Your system says to place your stop under where the test failed. Your

system also says that after a break out, the pullback is fine unless the move

back is strong. If strong, you exit.

You decide that the the uptrend is strong and price did move quickly away after the break out, so you'd

ignore the strong pullback. Problem now is price is back into your entry and

close to your stop but since you are convinced of the move, you pull your

stop.

Price breaks down and your loss accumulates. If your smart, you exit.

If you think the market is going to come back on a retrace, I can tell you that in this case it never does. Your

loss becomes huge.

What makes this worse is if you also increased position

sizing on this trade!

You don't have to be the smartest on the block. You can be average, follow a proven method and plan, and find

success. On the other side, you can be the brightest and better capitalized but

if your behavior is not conducive to good trading practices, you will end up

on the sidelines.

While I don't think 100% of trading success or failure is behavior related, it is a huge piece of the trading success

pie. It may not always be easy to exhibit trading behavior that is on the

side of a winner, but it certainly is something to strive to perfect.

In doing so, you put the odds on your side.