Written by Lane Mendelsohn
While other families talked sports, politics or what’s happening in the community around the dinner table, we talked trading. My father, Louis Mendelsohn, pioneered the application of personal computers and trading software to the financial markets and has been at the forefront of the industry for almost four decades. I can’t remember a time in my life when I haven’t been completely immersed in trading and the markets.
I’ve literally talked to thousands of traders from my years working at Market Technologies, my father’s company. While their stories are different, there are so many similarities, especially when it comes to the reasons that prevent them from being consistently profitable in the markets.
The following are ten of the most common mistakes I’ve heard over the years and the advice I give to traders to get them back on track.
- Stop Emotional Trading
I’ve talked to trading legends and investing newbies and they all grapple with the emotional roller coaster that is trading.
Why is it so difficult to control your emotions? It may lie in our genetic make-up. When you feel emotions while trading, there is a physical, chemical reaction that is happening inside of you. You have evolved to avoid pain and discomfort and developed a flight instinct. This is why most traders embrace flight. Flight from the market (at the worst time), flight from systems (because of the discomfort of drawdown), flight from success. This is all normal.
However, learning to take the emotion out of your trading is integral for long term success.
- Approach the Markets from a Global Perspective
Many traders don’t know how to incorporate a multi-market or ‘intermarket’ approach into their trading. They only look at a single stock or asset class and fail to account for the big macro picture. For stock traders, this often means only looking at the equity in isolation and if they do consider other markets, it’s the equity indexes or other stocks in the same sector.
But my father, Louis Mendelsohn, the founder of VantagePoint Intermarket Analysis Software, recognized as early as the 1980s that there are dynamic interconnections between related global markets. Still, traders too often take the historically narrow, single market focus of analyzing each individual market by itself, instead of incorporating it into a broader, global, multi-market or ‘intermarket’ analytic framework.
- Use Leading Technical Indicators
So many traders tell me that they operate only in hindsight. They study a chart on Wednesday night, look at a moving average and see that a particular market they’re interested in is trending up or down? Upon further inspection, they find that the trend actually started on Tuesday morning or earlier and that they’re already a couple of days late in getting into the position.
Technical Analysis is simply a reaction to past price action, and by using traditional lagging indicators such as Moving Averages, there’s often missed opportunity. I have found that using a predictive trading software like VantagePoint that uses leading technical indicators helps traders get in to trends earlier, and therefore they have more confidence to stay in winning trades longer.
- Move on to the Next Trade.
I can’t tell you how many times I’ve spoken with a trader who wants to tell me about a gold futures trade (or AAPL stock or a FX pair or whatever) from five years ago that was once a winner that turned into a loser. They can’t seem to get past it.
Traders need to remember that losses are part of the game of trading. Every trader will have some losses. In fact, many successful traders have many more losing trades than winning trades. But they still make money because their winning trades are considerably larger than their losing ones. You must think of your losses as part of the expense of doing business as a trader.
Just like any business, trading involves having such expenses as your technical analysis software like VantagePoint, you data feed, your commission to your broker, etc. Losses are just another expense. Always try to keep them to a minimum but realize you will have this expense in your trading.
- Remain Objective at all Times
Most traders don’t want to acknowledge that a trade could turn against them. They enter the market assuming they’ll be successful, refusing to look in the rearview mirror. It’s also common for emerging traders to use a calculator to predict how much they’ll make and how they’ll spend the unrealized profits!
I have found that entering the market with a neutral attitude is a good approach. You need to believe anything can happen in the market at any time. This is what being objective is all about. A profitable trader needs to be thinking constantly that the market can do whatever it wants whenever it wants at any time. Many traders get into trouble by thinking the market can’t or won’t do certain things.
To be objective, you cannot put your demands and expectations on the market. This doesn’t mean that you can’t have an opinion about the market. It only means that your opinion can just as easily be wrong as it is right. And you need to be completely ready and comfortable for it to be wrong. You need to release yourself from having to be right. The more objective you are, the less you will distort the information you receive.
- Trade from both the long and short sides of the market
A common conversation I have with traders is trying to get them to be comfortable with initiating short trades. I tell them that if you fail to learn how to utilize short trading strategies, then you have cut yourself out of a number of profitable trades. Many people think that shorting is un-American or too risky. However, by not learning know how to go short, you’re putting up a roadblock to one of the potential trading avenues you have to earn profits, particularly during a declining market. The market is a two-way street, and the person who doesn’t short is missing a part of the game.
One of the great things about the VantagePoint predictive trading software is that it finds trading opportunities for both the long and the short sides of every asset class. It has a powerful Intelliscan® feature that looks for trending opportunities based on intermarket analysis.
- Always Use a Stop Loss
I’ve heard people say they don’t want to use stop orders because they think that the market will hit their stop orders and then immediately start moving in their direction after they’re stopped out. And you know what? This will happen sometimes.
For people who attempt to use mental stops (where they’ll just get themselves out of the market instead of putting the stop order in the market), the problem comes when the market does go through their mental stop orders, then reverses and starts moving back in their direction. Usually, these people are at a loss as to what to do next. And the unfortunate thing is that it usually costs them a lot of money, as they do not act in their best interests. They let losing trades turn into huge losing trades.
Using a stop loss is key to preserving your capital over the long haul.
- Employ Proper Risk Management
Personal psychology influences our thinking and decisions about money. A trader should never risk money they can’t afford to lose. Certainly, no one wants to trade with the goal of losing money but one must be ready and prepared for such an outcome.
I tell traders that a good way to prevent this is to reshape the way they think about risk. Traders often make one or two mistakes when it comes to determining risk; they either define the reward first, which is a mistake born out of greed, or they put a stop loss on the setup that is much too close to the entry to give the trade a chance at working out.
When learning to think in probabilities and to view the market in terms of risk to reward, it is necessary to calculate the risk on a trade setup first, then you can calculate the reward as a multiple of the amount you have at risk. By concentrating on the risk first, instead of the reward, you are making yourself more aware of the risk involved on each trade setup, instead of becoming fixated on how big of a reward you might make, as many traders do. This will also turn you into a “risk manager”, rather than a “trader”, the best traders in the world know that consistent trading profits come as a result of managing risk effectively, so consider yourself a manager of risk from now on.
- Preparation is Key
In trading, Winston Churchill’s famous quote, “Fail to plan, plan to fail” rings especially true. When you enter the market arena, you had better be prepared. However, few traders perform the necessary due diligence before moving headlong into the markets.
You can’t just walk into the market with a handful of money and expect to take money away from the professionals. If that’s the case, you’re gambling, not trading. Many who trade successfully rely on a trading plan. Just like how a business plan outlines the establishment and development of a proposed business in detail, a trading plan outlines, in detail, a structure for trading.
I personally know some of the most successful traders in the business like Larry Williams, Jake Bernstein and others and guess what, they are diligent about their preparation and planning.
- Don’t Trade in Hindsight
The trading world has evolved considerably since I was a little boy talking markets around my family’s dinner table. There’s literal rocket science available to the retail trader, including VantagePoint software’s Neural Networks. These Neural Networks study data and “learn” subtle relationships within and between related domestic and global markets. They can then recognize hidden repeating patterns in global market data and use this information to make highly accurate predictive market forecasts that you can apply to your trading.
I tell traders that instead of using old outdated technology, they need to use 21st century tools to compete in today’s complex global markets,
About Lane Mendelsohn:
Lane Mendelsohn has been involved in the financial industry since the mid-1980s, when he joined Market Technologies, founded in 1979 by his father, Louis Mendelsohn, a widely recognized pioneer in the trading software industry.
As a child, Lane began to accompany his father to financial conferences throughout the country where his father was an invited speaker, as well as to business meetings with leaders in the financial industry. Through these experiences Lane became familiar with the financial industry and trading software field, and developed personal, and later professional, relationships with many top technical analysts, stock and futures brokers, trading software developers, and money managers in the United States and overseas.
In the following years, beginning as a teenager and throughout his twenties and into his thirties, Lane contributed significantly to the company’s growing success as an Inc. 500 company. He became involved in virtually every aspect of the company’s operations including software sales, marketing, product research and development, trader education, website development, staff recruiting and training, and general management.
Focus, determination, persistence and a passion for the financial markets have allowed Lane to approach his increasing responsibilities at Market Technologies with unbridled enthusiasm each day. As Lane continues to demonstrate excellence in his performance as a C-suite executive at Market Technologies, it is expected that one day he will take over the helm when his father, now 67 years old, decides to retire as Chief Executive Officer.
In addition to his professional activities, Lane remains committed to giving back to his local community, by donating time and financial resources to various charitable organizations each year. In 2009 he was recognized by the Tampa Bay Business Journal as an honoree for the Up & Comers Award in the “30 Under 30” category. This award recognizes rising professionals committed to excellence and high standards of integrity in their professional careers and in their community involvement.
Lane is not all business, though; or at least not entirely so. He enjoys relaxing at his Wesley Chapel ranch with his wife Mandi and two young daughters where they breed and raise farm animals as a hobby. Although he does this to relax, he is never one to pass up a good buy or a profitable sell on livestock. Sometimes, you can take the man out of business, but you can’t take business out of this man.