Three Limiting Factors That May Affect Your Trading Prosperity

These three barriers can be interrelated, but we will break them down and address each one. Every trader has experienced one or all of these barriers at some point in their career. Even after identifying these problems, we must deal with them throughout our trading careers. These are human emotions, and there is no way to eliminate them. But, by being aware of their traps, we can be more mindful of when they affect our trading. The objective is to train your mind to work around them rather than become their victim.

The three barriers are: 

• Fear
• Greed
• Ego

Fear 

In the trading community, the word fear conjures up several situations. The first is losing money and sometimes more than we had anticipated. This situation can quickly happen when we don't have stops in the market. Traders who attempt to use mental stops may realize that when it is time to pull the trigger, they cannot stomach the loss and decide to stay in the trade in hopes of it turning profitable again. As these positions continue against the trader, they are eventually forced to liquidate these losing positions, either by a margin call or by becoming physically sick due to the significant losses. Now, these same traders who have just panicked and liquidated their positions very near a market top or bottom see the market immediately reverse and go the other way. When enough of these panic orders come to the market, a popular reversal chart pattern called a "V" reversal is likely to occur. Once all of these panic orders were absorbed by the market, no more orders were left to sustain the panic move. 

These same traders now see the market going the other way and must decide if they want to chase the market. Often referred to as "Fear of Missing Out (FOMO). When traders trade with this fear, they most likely do not have a trading plan and trade by pure emotion. Or, perhaps they need more discipline to follow their trading plan. The odds are that these same traders will watch the market go the other way until they cannot stand it and jump back into the market right near the other extreme of the move.

A potential problem with having significant losses is how you manage your future trades. One of the problems is that the fear of taking a trade becomes more prevalent.   Typically, traders who exhibit this fear freeze when the following trade setup appears. Due to the fear of losing more money, the trader hesitates as the trade setups. They cannot pull the trigger to enter this trade. As the trade unfolds and the price begins to move in the anticipated direction, the trader may enter the market long after they should have, known as chasing the market. The biggest mistake in this late trade entry is that the trader tries to use the original dollar risk size, which is now more extensive due to the late entry. 

These two types of fear can negatively affect a trader if one loses money. We all work hard for the funds that we trade, So when the next trade comes along, we could have trouble pulling the trigger in a timely fashion to enter the trade simply because we have memories of that significant loss from the past. This could cause you to get in late and end up chasing the market again. The other problem is that you could take profits too early the next time, thinking about your significant loss from the past. You will see your equity return to "even" or a small profit and exit. Often referred to as the "letting your losses run and cutting your profits short" style of trading. Taking smaller profits can lead to a feeling of not making enough money, which could lead to feeling you need more money and result in the next barrier - Greed.

Greed 

Have you ever been in trades that you know will keep going to the moon? Your target objective was met long ago, but your "Greed" monster tells you the price will go much further than expected. This is a good case of overstaying your welcome. In the futures markets, you could become a victim of "Locked Limit" moves against you for days with no way of getting out of your position. Ask anybody who has traded the grain or coffee markets during a weather-related market if you want to hear how fast a profit can disappear. Once the market goes against you, many other traders with the same idea as you will get out of their positions. Keep in mind that there are only so many buyers and sellers in any market, and when everybody heads for the same exit getting out without losing much profit can be very difficult. Your trading plans must have logical profit-taking strategies in effect. These can be fixed targets or trailing stops, but have the rule defined in your trading plan if you want to reduce the greed factor.

Another side of greed affects the trader, who has a significant loss. For some, the logical thing to do would be to leave our trade desk until we regained our rational thinking. For others, they will continue to revenge trade. Ignoring their trading plan, taking large risk trades, and taking several small profits will lead to irrational decision-making. And since they are not following their trading plans anymore, they will be trading on pure emotion.

Then we have the traders who assume that the market is going to the moon and mortgage the house to place their bets. I'm sorry, but nobody knows exactly where the markets are going. These traders risk everything on one trade; we know what usually happens next. With that said, there are times when the trade has a high probability of working. A professional trader will calculate the maximum contract size based on the funds in their account and place the trade accordingly. This could be a percentage of the account size already identified in their trading plan. Professional traders are not gamblers and will not risk their accounts on any trade. Trading is a probability business over a large sample of transactions. 

Each of us has a personal pain threshold of monetary loss we can tolerate. If you don't have one yet, trust me, you will at some point in your trading career. Once we exceed this threshold, we start trading in fear, and this vicious cycle begins again.

Ego 

Another barrier that can be just as devastating, if not more, is ego. Usually, when talking with traders about the markets and human nature, fear and greed will come up. Some refer to this as "Egoitis," coming from our egos' fear of losing their relevancy in our decision-making process. Your ego will resist you and probably win in more ways than you can imagine. 

One way ego can affect your profit potential is to cut them short. We all know the rules about allowing profits to run and cutting our losses. Our Ego can be like a little child seeking instant gratification. By taking our profits early, it gives this quick little reward. On the other hand, our ego can be so fragile that it hates to lose. So when a position goes against us, it tells us to stay with it and wait for it to return. Or it could try to get you to double down, telling you that the market only has to come back halfway to be at breakeven. Either way, the ego will continue to ruin your trading. There is no place in the markets for ego. The ego can generate opinions on its desires. If your ego has already made up its mind, there is no way you can see what the market is doing clearly.

Let's face it, we, as traders, like to talk about our successes but not our failures. Just as a trader who suffers from greed, our ego can cause us to stay in a trade longer than we should while making a profit and cutting our profits short. Since the ego always wants to be correct, this can lead to costly mistakes. Regarding losses, our trading plan should help override our ego by forcing us to take our profits or losses at the pre-defined location.

As I said earlier, we are all humans and cannot eliminate these barriers. I know people who have traded for a long time (myself included), and they still battle with episodes of each of these barriers. What is essential is to have a written trading plan to help us be as mechanical as possible with our actions. This allows us to reduce the emotion in our trading and, therefore, the fear. Keep in mind, too, that trading is all about probabilities! Successful traders did not make just one big win. They consistently took small amounts out of the market over a long period. 

I wrote an article for Barchart.com titled "Getting an Edge From Consistently Profitable Traders," I described some ideas that may help you recognize when these three barriers are hindering your trading results. 

So remember that we will always have these little setbacks along the way, but if we follow our rules, they will be just that, "little" setbacks.

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