1- Including Untested Element in Your Strategy Because It Worked Once
You might be tempted to implement modifications to your strategy during its testing phase. Adding simple things that apparently make sense to you but that are not supported statistically.
Let’s say you are testing your strategy on the live markets. You are currently experiencing a losing streak, which means it is time for some change (bad idea). You decide to add a generic indicator that will narrow down your entries to increase your accuracy.
Now, let’s say that the first trade entered while using this indicator ends up being a winner. You’ve been on a losing streak and the one time you start using this god sent indicator, you win. It can’t be luck, can it? Well, yes it can, and it probably is.
As long as a variable in your strategy has not been tested over a large sample pool, there is no way to tell whether or not it is adding value to your trading regiment. If you want to include it on your core strategy, keep testing it on different market conditions.
2- Justifying An Entry When There is No Entry Signal
This usually happens either during a long string of losses or during a slow period where there seems to be no entry signal. You spot a below average setup, yet try to convince yourself that it is, indeed, a valid entry signal.
You start looking at timeframes that you normally don’t use, you take a look at the most recent fundamental news even though you only use technical analysis, or you use indicators that you normally wouldn’t use. Anything that could justify an entry.
The moment you start adding variables to justify an entry, I suggest that you stop trading for the day. Even though you might miss a winning trade, it will reward you in the long run.
Your desire to enter a trade will cloud your judgment. By the time you realise that you made a trading mistake, it is usually too late; the damage has been done.
Whatever the market is offering you, you should never diverge from your original trading plan. Even if it rewards you with a winning trade from time to time, there is no way to calculate whether or not these “trading instinct” entries have a positive expectancy or not.
When I talk about trading instinct, I am referring to the concept of “feeling a trade”. If you are not a highly experienced trader with years and years of trading full time, I suggest that you don’t try to enter trades based on instinct or feelings.
3- Not Documenting All Your Trades – Especially the Losing Ones
Documenting all your trades is a good idea. I even recommend dedicating a notepad file to each trade where you can briefly explain the reasoning behind your entry, that way it makes more sense if you review your setups in the future.
It might be useful to review winning trades, but what will be the biggest use to documenting your trades is to review your losers. Remember that what makes or breaks a trader is how they can handle a losing streak.
Explaining your reasoning behind the entry of a losing trade will reveal whether you are simply going through an unlucky string of losing trades, or whether you are adding fuel to the fire by making trading mistakes that are simply making the drawdown bigger.
After each losing trade, you will have the opportunity to review your reasoning and to evaluate your performance with a calm mind. You will then be able to pinpoint your mistakes (if you made any), and correct them.