I've done a short post here detailing some trading errors I've come across while training and mentoring other traders. It may be that you might recognise one or more of these issues in your own trading.
Trying to predict what will happen
Having preconceived notions about what you think may happen in the markets can lead to poor performance, particularly if you trade using a systematic method such as trend following.
Quite often, you will end up in a situation whereby he system is giving you a signal in one direction, whereas your mind is suggesting to you that either you should do nothing, or worse still, suggesting that you go in the opposite direction. Quite often those trades which go against your instinct can end up being your biggest winners.
We are currently experiencing some turbulence in the markets, with a lack of direction and increased volatility. This has been after a prolonged run up in prices. Who knows if this is the start of the markets reversing trend? I know I have no idea. Last week I spent a lot of time talking to those traders I mentor, as well as others, about having faith in your system and what it is telling you. The current issue would be to close trades for fear of the market reversing trend, which may have a knock-on effect on the stocks you are currently trading. Again, having the ability, confidence and discipline to stick to your rules can only be learned through experience, maybe with the help and support of another trader or mentor.
There was a stark example of this given in Larry Hite's interview in Market Wizards, where he talked about a friend who managed to lose his trading fortune and personal estate as a result of a bad gold trade, where he ended up trading in the opposite direction to what his system was telling him. In that case, he stated that his system was wrong half the time, and in essence, didn't trust the signal being given.
I have also seen the situation where super looking signals and set-ups are ignored, based on some preconceived notion about that particular stock, or a fear about what the general market might do, or because of opinions made by other traders. (NOTE: I'm pleased to say that, amongst those I've mentored, I'm not aware of any signals being taken in the opposite direction to what the system is telling them!)
This is why I talk a lot of being compatible with what your system is telling you. The system parameters should be designed and configured to achieve a certain result. If you continually override or ignore those signals, then why trade that system?
Trading too big a position
I have a friend who is trading a short term system that is producing (on paper, and on the charts) nice results, yet he has been unable to replicate those trades. After investigating, it became apparent that, yes, he was taking the signals, and he was adhering to his stops, but he was unable to stop taking his profits way too early, for fear of the trend reversing, resulting in a loss of those gains. The root cause was that he was trading too large a position relative to his equity. Once he was able to reduce the risk per trade to a more comfortable level, his profitability has jumped up massively, even though he is trading much smaller position sizes.
In all these cases, there was one common denominator that was causing the issue. Can you guess what it is?