July 23, 2024
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Read time:
5 minutes
If I ask you to think about your three most frustrating trading moments, what comes to mind?
If you’re anything like me, it won’t take you long to have an answer. Those trades live as vividly in my memory as my most satisfying profits. And It’s not just me. Whenever I meet up with other traders, the conversation always finds its way back to ‘the ones that got away’.
There are two main categories of frustrating trades: the missed entries that would have been huge, and the ones you exited at just the wrong time.
Either way, it’s usually due to a mistake you’ve made. What makes them frustrating is that you should have known better.
Scientist Simon Ramo once wrote, “In expert tennis, about 80 percent of the points are won; in amateur tennis, about 80 percent of the points are lost. In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser.”
That means, the winning strategy for an amateur is to focus on making fewer mistakes.
Trading is similar. Early in your career, after you’ve learned the necessary skills and concepts, the biggest impact on your performance won’t be your moments of genius, it’ll be your mistakes.
Let me be clear, we’re not talking about times when the problem is a lack of knowledge or skill; those wouldn’t be mistakes. Instead, this is about the things you’re capable of doing and shouldn’t be getting wrong.
The problem is, many of our mistakes are due to cognitive biases and mental blindspots. Research by Daniel Kahneman and other psychologists has revealed that we all have these, regardless of our level of intelligence or IQ.
But here’s an important caveat. The psychologist Keith Stanovich and his team discovered that if you explain to intelligent people how they might go wrong with a problem before they decide, they do much better
Therefore, if you want to minimise your trading mistakes, you need to find ways to anticipate where you might go wrong. Here are some proven strategies to do that.
1. Self-Reflection and Journaling
Every trader is told they should keep a trading journal, and most traders will give it a go. But very few traders manage to stick with their journal and use it effectively.
I truly believe that a trading journal is the most underrated and underutilised tool for improving your trading.
By keeping a journal, you can identify the mistakes you commonly make and find ways to anticipate them better in future:
- Create and follow checklists
- Have reminders on your chart or around your desk
- Add reminder text to trade alerts
But the benefit of a journal for avoiding mistakes goes even deeper than that. Journaling is a form of self-reflection, and this has been proven to be an extremely effective way to improve decision-making and problem solving.
As I mentioned earlier, we all suffer from cognitive biases and errors. Research links self-reflection with a reduction in these common biases and errors (Güss, Evans, Murray & Schaub, 2009; Locke & Latham, 2002; Osman, 2010).
Self-reflection can even lead to neurological changes in your brain that lead to you being more effective in future.
2. Prospective Hindsight
Prospective hindsight, also known as a pre-mortem analysis, is a cognitive strategy where you assess all potential outcomes, risks, and failures before taking a decision or action.
Think about a post-mortem analysis, this is where you analyse a situation after it’s happened and try to learn from it. With a pre-mortem analysis, you’re trying to do this before the event has taken place. You’re imagining it’s already ended with a negative outcome and brainstorming all the possible reasons for it turning out badly.
Rather than asking yourself “what went wrong?”, you’re asking “what could go wrong?” You can then run through all the potential issues you may not have considered otherwise. You’re encouraging yourself to be pessimistic and think about all the potential catastrophes.
One of the challenges we face in trading is our personal biases, which we can simplify as optimism or pessimism in particular situations. These biases are often referred to as ‘internal context’ because they shape the way we perceive the world around us. Prospective hindsight helps us to set aside these biases and examine potential risks more objectively.
3. Other People's Mistakes
A few years ago, someone left me an angry comment complaining that I was explaining what not to do in the markets. They didn’t want that, they wanted to be told what they should do.
You’ll find this throughout the online trading community. People watch videos of other traders explaining their ‘secret sauce’; the specific rules and strategies they used to succeed.
But if, like me, you’re sceptical about these gurus, you might not see much value in following what they do. On the other hand, these people are less likely to be lying about their mistakes and failures… And that’s where the value is!
“All I want to know is where I’m going to die, so I’ll never go there.”
- Charlie Munger
Analysing other people’s mistakes can help us anticipate and avoid them ourselves. We can enhance our trading by using the inversion mental model and knowing what not to do.
Taking It a Step Further
It’s not just people’s mistakes that we can learn from, we can also use people’s input in other ways. Getting feedback from other traders can help with your self-reflection process; they can point out blindspots you might be missing. As long as they’re vetted and you know you can rely on their opinion.
This is one of many reasons why our Duomo Community plays such an important role in our members’ development. Access is included as part of the Duomo Trader Development Program. You can find out more and apply here.
