How to Avoid Trading Errors
A series of comments from the Van K. Tharp discussion group.
Provided by Bill McCready of FuturesTradingSecrets.com

What Is An Error?

I think that most traders would agree that spotting mistakes and putting things in place to prevent them from happening again is one of the key paths to improving your trading.

In fact, making the same mistake twice and expecting different results is one of the definitions of stupidity, and we all know successful traders are not stupid, right? :-)

The question I have been struggling with in a previous thread is:

If you are a discretionary trader, how do you define a trading error,
and how do you differentiate it from 'good' trading?

For mechanical/systematic traders, an error would be any deviation from your trading system/rules/plan (or the incompleteness of your plan or method).

Are there any experienced discretionary traders out there that participate in this forum that can shed some light on this issue?

Paul

Reply To This Message

Discretionary traders also have trading plans. I think there is a general misconception that a discretionary trader is nothing more than a gun-slinging, shoot-from-the-hip cowboy who has less than a precise and qualitative approach to the markets. Perhaps in some instances that is accurate, but certainly is not in my case.

I view discretion (my definition) as the flexibility to read the market in real time. In addition, it is discretion within a structured context. I use technical indicators like anyone else to give me the edge that I need based on my personal experiences. Some people might look at the way I trade as some kind of mystical intuitiveness, but I view it as a probability statement based on my personal interactions with the markets through the years.

My personal beliefs are that trading is 95% psychological and my definition of what constitutes a trading 'error' is probably not much different from yours. I've made an 'error' when I push a trade that should not have been made in the first place. I've made an 'error' when I get mentally sloppy. I've made an 'error' when I don't adhere to the trading rules that I've made for myself.

As I create a list of trading 'errors,' I realize they are all psychologically based. Losing money on a trade means nothing as long as I have executed properly. Good trading is executing properly and most importantly, being in control of oneself.

Being mentally in control has always been the most difficult aspect for me, but I seem to get better at it through the years. But it is something I am constantly addressing on a daily basis.

I don't think there are too many traders who are purely discretional or perfectly systematic. I think most traders blend the two approaches to various degrees. I certainly am structured in my approach but I also realize the artwork involved in creating opportunity the market presents

I hope I have been able to 'shed some light' on your question.

Terry

Terry,

Thanks for your informative answer. I agree with you that most traders will not be at the very extremes of the systematic-discretionary continuum.

I started out with the belief and objective that 100% mechanical was the way to go, but have moved slowly towards the discretional end as each year has passed. I am approximately 95% mechanical right now, and I see as my trading evolves that this percentage will continue to drop slowly as my 'feel' for trading increases based on the gradually increasing number of trades in my past.

I can envision a time in the future where my systems become a 'framework' for my trading, with a larger proportion of discretion. I think this is only natural as we evolve from novices (where discretion has a negative effect on performance) to experts (where experience can improve the performance, and make up for the caveats of a purely systematic approach).

Regards, Paul

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