- Stock or instrument selection;
- Risk management;
- Evaluation or interpretation of current market conditions (are they favourable to your chosen method?);
- Self sabotage (overriding or ignoring entry or exit signals).
This is one reason why, when I am mentoring a trader, the preferred timeframe is for at least a year, to ensure you encounter these different market states.
A critical element of keeping things on track is to ensure you mantain good quality trading records, and go through these regularly.
You have to evaluate your own performance (or get someone else to do this for you) in the most objective manner. To do this, you have to keep accurate up-to-date records, so that any issues are highlighted as soon as possible. It is no good updating your records once a quarter, or on some random basis. You have to treat trading as a business.
Any shopkeeper or owner of a business who has good internal financial controls and systems will be able to see up-to-date accurate information. Why should you be any different?
When reviewing your records, you cannot wear rose-tinted glasses. If an issue is clearly amiss, then you need to ascertain the reasons for it, and put into place an effective action plan. There is a saying that 'being wrong is acceptable, staying wrong is unacceptable'. If you pick up something as part of your trading review, then if you don't put in a plan to remedy the issue, then that is unacceptable.
If your results are not as anticipated, then generally if you keep on doing the same things, you will continue to get the same results. I will however qualify this to a point - with trading, you can identify great looking set ups, and yet will end up making a loss on the trade. That happens. My win rate around the 40% level, so I am wrong more often than being right, yet the wins are much bigger than the losses, so that creates the overall profitability of the system.
Sometimes, you can get into a run of losses - more likely than not, that may be down to a change in the general market conditions. Your P&L should tell you this, as well as any statistics or performance metrics that you keep. If something changes, that should raise a yellow flag, and encourage you to identify the reasons why. To simply say "the system doesn't work" is wrong.
For example, day traders need volatility to make money. When markets are slow, is becomes more difficult to make any profits as there are insufficient intra-day movements for them to capture. If they are not careful, they can either end up chewing up capital, or start taking on more risk (bigger sized positions) to try and catch smaller moves. The good day traders would have some form of mechanism to ensure that, when the conditions are not favourable, they walk away and keep their capital intact.
The other night I was reading about an option trader in one of the Stock Market Wizards interviews - he had undertaken a review of his own trading activity (and also got one of the Wizards to do the same) and they both identified that he made most of his losses on option expiry days. If we was able to stop trading on those days, he would be fine, but he could not leave them alone - he wanted to be involved, he wanted the excitement. He knew that this was the cause of his big losses, but he could not stop trading them. He ended up blowing up his account. A classic case of identifying the issue, but being unable to act on it.
It is the same for trend followers - if volatility suddenly increases, or you encounter a run of losses, the first thing to do should be to step back, observe what is going on, and review your trading records. If you look, you will be able to find a reason. Then it is a question of putting a plan into place that you can follow.