27 Trading Mistakes I Wish I Avoided Sooner

In this video, I'm going to show you 27 trading lessons that I wish I knew earlier so you don't have to make the same mistakes. I've been trading for over 20 years, quit my full-time corporate job in 2012 to trade full-time, and I've been trading and teaching traders since then. In that time, I've made so many trading mistakes that have added up to millions of dollars of lost compounding profits. I've also seen students make countless mistakes that I've helped them correct and improve their trading. Let's get right into it. Lesson 1 is that your trading strategy is not the problem, your execution is. Most people spend so much time looking for the perfect strategy, jumping from strategy to strategy, trying to eliminate all of the drawdowns, all of the dips, all of the things they're uncomfortable with. When in reality, what you need to do to make money trading is have a good strategy, implement it well, and track your performance carefully, and then move on and find another good strategy. We'll talk about that in another tip. Soon. The second trading lesson is that your backtest is only as honest as your assumptions. Most people are so quick to jam their rules into the backtester, hit go, look at the results, get excited when they have a nice smooth equity curve, optimize it to improve it even further. The trouble is I've seen countless traders get excited about their backtest, about their system results, only to discover later that there's an error in the code or they've got a flawed assumption or they have a future leak well, they haven't accounted for slippage and commissions. So spend more time getting the code right before you run the backtest, before you do any optimization and get excited about how amazing and smooth the equity curve. And a bonus hint here is when you run a backtest, if the equity curve looks amazing and it's beautiful and smooth, laser sharp with low drawdowns, you've probably got a mistake in the code. So spend more time getting the code right for your system before you do anything else. That time will save you hours and hours of rework when you realize down the track that you had a future leak in your trading system. The third lesson is that consistency in trading comes from constraints and rules, not from freedom. A lot of traders look for a discretionary approach, which allows them to incorporate all of their knowledge and their research and the things they think and feel are gonna do well in the economy. But the reality is all of those things are just emotional decisions. And if you put constraints around how and when you'll trade, how you'll size your positions, and put rules in place for all of those things, your consistency and your results will improve dramatically. This is why having a trading system which guides every single trade you make is the biggest step a trader can make to improve consistency. Beyond the system, you need a trading plan to tell you how you're gonna add capital, how you're gonna allocate capital between strategies, and how and when you're gonna withdraw money from your account. Having rules for all of these things dramatically levels up your consistency and therefore your results. Lesson 4 is that you don't need more time, you need fewer decisions. Decision fatigue in trading is real, especially for discretionary traders. But if you've got rules that guide every single decision you make, systems in place that tell you when to buy and when to sell and how much to buy, those decisions reduce dramatically. Trading becomes far easier. It uses less time and there's less emotional fatigue. Put systems in place, make fewer decisions, and your trading will improve. Lesson 5 is that risk management isn't a safety net, it's the strategy. If you don't survive in trading, if you blow up your account, you've lost everything and you have to start again. And everything you did before that makes no difference at all. You could make 1,000% this year, but if you blow up and lose everything next year, it doesn't matter how much money you made because it's all gone. Risk management is the strategy. You've gotta survive in this game so you can reap the benefits of your trading. If you blow up, all those benefits are gone and it means nothing. So risk management is the primary strategy. Must survive first and then think about making money in your trading account second. Lesson 6 is that we need to expect variance. Most traders underestimate how much variance can happen within their trading strategies. Even if you've got a great solid backtested system, the variety of outcomes, the range of trade wins and losses you can get is far wider than you would think. And the range of possible equity curve outcomes is also far wider than you'd think. So do things like Monte Carlo analysis to understand how wide the variation in your trading strategy could be so that you can be emotionally prepared for that. And so that you can allocate capital accordingly. Too many people will run a single backtest, look at the equity curve, say, okay, it's got 20% return and 15% drawdown, great, I'll allocate 20% of my capital. But if you run a Monte Carlo analysis on that equity curve, you'll see that the possible drawdown could be much, much higher. And maybe you would be a little bit more conservative with how much capital you allocate to that system. Lesson 7 is that your confidence determines your success with a particular strategy. So if you have low confidence with a strategy, you're highly likely to sabotage it, to pause it unnecessarily, to stop mid-drawdown, or to allocate capital away from that strategy. You must backtest sufficiently well to have 100% rock-solid confidence in every strategy you trade so you can let the strategies do their thing. If you don't have the confidence to take every trade exactly according to the system, you shouldn't be trading the strategy at all. You need to backtest it sufficiently well so you have rock-solid confidence. Otherwise, the game is lost. Lesson 8 is that win rate is a distraction metric. It actually has very, very little to do with long-term profitability. A system that claims 95% win rate is very fragile. You have lots of very small losses and a huge tail risk that's gonna bite you in the backside when it comes along. You might make very smooth returns for a long period of time, months or even years, but eventually something is gonna come along and wipe you out. You don't get a high win rate for free. There's always a tail risk. In contrast to the high win rate systems like that, a trend following system that has 30, 40, or 50% winners and much bigger wins than it does losses is much more robust and is likely to keep making money in the future. Unfortunately, those lower win rate systems come with a more volatile equity curve, but the systems themselves tend to be more robust. Most good strategies have a win rate somewhere between 40% and 70%. Outside of those ranges, it becomes very hard to trade and the risks become too great. So looking for a strategy that has a very high win rate is a distraction and it won't improve your trading long term. Lesson 9 is that the market doesn't care about your last loss. If you got smacked in the market yesterday or you just took a big loss, that emotionally impacts you. It changes absolutely nothing about the market. It means nothing for the next trade your system generates, and it means nothing for whether or not you're going to make money tomorrow. It only affects your mind. And if you let it affect your mind negatively, then that's going to distract you and cause you to have mistakes and losses on your next trades. Not because the system's at fault, not because anything else has gone wrong, but because this has gone wrong. The market doesn't care about what happened to you, so you've got to act accordingly. Lesson 10 is that this time feels different is very expensive thinking. Very rarely is this time different enough to warrant overriding your system. And if you've got a good portfolio of strategies with conservative capital allocation and low leverage, you don't need to worry about whether this time is different because you've got strategies that make money in up markets, sideways markets, and down markets, during volatile times and during quiet times. If you're suitably diversified, it doesn't matter whether you think this time is different or not. It's probably not any different. And if you act accordingly and, and, uh, follow your systems, you'll do well. But if you act on that fear that this time is different and you override your strategies, there's a very high chance you're gonna get smacked and lose a lot of money. Lesson 11 is that the best trades often feel uncomfortable. If trading was easy, everyone would do it and there would be no money to be made. But the very best systems feel uncomfortable to trade. The very best trades within those systems are often the ones you just don't wanna take. So again, we have to build rock-solid confidence in our strategies so that when the signal comes up, we're confident to take them. That'll allow us to make money and realize the expectancy of the system. The trades that feel obvious, the trades where everything is lined up and everyone is talking about it and it just feels good to get in, they're probably the trades that are already finished and the market is likely due for a reversal. My approach is when the system gives a signal, I take the trade. I don't think about what I feel about the trade. I don't look at the chart and analyze it. I just take the trade because I know my emotions are not the key to trading success. Following the system consistently is. Lesson 12 is that simplicity scales and complexity breaks. The best systems are very simple. You don't need hundreds of lines of code. You don't need 15 different indicators. You need a couple of filters, an entry trigger and an exit trigger, and maybe a stop loss plus some position sizing rules, and you've got a strategy that's probably robust enough to trade with real money. If you have more than half a dozen rules, then you wanna think very carefully about how complex it is because it's very likely to be overfit and break in real-time trading. Lesson 13 is that the smaller smoothness of your equity curve matters more than your absolute P&L. You might feel great if you had a 50% up month, but if you've got a 40% down month after that, that's gonna get emotionally very, very draining. And after years in the game, those fluctuations are gonna wear you down and make trading very, very difficult and stressful. I found that a smoother, more consistent approach, more conservative position sizing, lower levels of leverage make trading day in, day out effortless. And make it much easier to build wealth long-term. So go for smoothness and consistency over high absolute returns. Lesson 14 is that when you're a discretionary trader, you're trading your psychology, not the market. This is why trading systematically is so important because everything that we think comes through our filters and our beliefs and our experience and our emotions. And so it's very hard to make consistent decisions in the markets. But if you have a systematic approach guiding you, telling you exactly when to get in, exactly when to get out, That psychology is removed from the game and trading consistently becomes much easier. So trade systematically instead of with a discretionary approach. Lesson 15 is that crowd behavior is real. Most traders bail out right before the bottom. Most traders get in right at the top. This is a mass psychology game. And to make money, you need to stand aside from that mass psychology. Follow rules that get you in and get out when maybe it's not emotionally comfortable and maybe it's not even popular. When everyone is talking about a stock, that trend is probably over. When everyone's talking about how the market is, is dead and the world is going to crap, the bear market is probably over. When maximum fear is in place, the market is likely to turn around. When maximum exuberance is there, the market is likely topped. The trouble is we're not gonna know when those things are most of the time because we're too busy emotionally trapped in that situation. We need rules to guide us. And that takes the emotion out of the game and allows you to make money consistently. Lesson 16 is that overtrading can kill your results. Too many traders are frantic ADHD-driven people wanting to take action. They call themselves a trader, so they feel like they have to trade. But sometimes the best thing you can do is sit on your hands and do absolutely nothing and wait. Again, if your system hasn't triggered a trade, don't go looking for a trade. Just accept there's nothing to do today and move on. Being in cash is a legitimate position, but frantically looking for another system to use up all of your available capital and make sure you've got 15 trades to place today is not a legitimate approach. It's likely to lead to mistakes, drawdowns, and big losses long term. Lesson 17 is you can't trade a system that you don't trust. This is back to the confidence issue. Whenever I'm launching a new trading system, I make sure I've tested every single concern I have about that system before before I risk a single dollar on it. So I'm running the backtest, I'm going through my whole backtesting process, and then I'm thinking, okay, what am I uncomfortable about in this system? What situation could come up that might lose me money? What trades are happening that I don't like, that I'm not comfortable with? And I'm testing ideas to try and deal with all of those concerns. I call this backtesting my emotions. I do this so that all of my concerns are out, they've all been tested, they've all been identified, and everything that's left at the end of the day is the rules that I've got confidence in. That way I can follow the system absolutely without sabotaging it. Lesson 18 is that data beats opinions every single time. I can't tell you in the last 20+ years how many times I've thought that something would help and it hurts. I've thought that something would work and it doesn't. I thought that something would— doesn't work and it did. You need to test everything no matter how logical and obvious it feels. The markets are not intuitive and things that we're trained for in school and university in our life don't apply in the markets. Test every assumption. And if you're not making money and you've got rules, you've probably got some assumptions built into those rules that you haven't tested yet. So sit back and think about, okay, what am I assuming is true about the market and test it and get some data to see if that is actually right. Chances are it won't be. If you've got a hunch, backtest it. If you've got a rule, an idea, a filter that you think will improve your system, backtest it. If you haven't got data to validate it, it doesn't deserve a place in your trading. It's just too risky. Lesson 19 is that the goal is not to be right, it's to be profitable. You don't need to be right on every single trade to make money. In fact, you don't even need to be right on most of your trades to make money. In the first decade of my trading experience, My experience, I used trend following systems that were right 30 to 40% of the time, and yet I made an absolute ton of money. Now I've got a mix of systems, some high win rate, some low win rate, but too many traders are obsessed on making money in this trade, on this stock, on this ticker. Instead, if you focus on following the process, following your strategy and making money, then it doesn't matter whether you're right or wrong. You can be right ultimately by making money, but you don't have to worry about being right on each individual trade. That actually has no bearing on whether or not you're profitable long-term. Lesson 20 is that small mistakes compound very, very quickly. If you have a leak in your daily trading process, if you're sloppy in your record keeping, if you don't check for mistakes in your day-to-day trading process, that's gonna compound and very quickly erode your edge. We need to execute flawlessly if we're gonna be consistent and make money in the markets. Lesson 21 is that most breakthroughs come from subtraction, not addition. By taking something out, taking out a bad habit, taking out a mistake, taking out a leak in your process, taking out an unnecessary rule. These things actually move us forward a lot in our trading. Very rarely do you make a lot more money by adding another rule, adding another step, adding more complexity. It's by taking it out and simplifying it down to its essence that your trading becomes really world-class. Lesson 22 is that market conditions matter more than you might think. I think it's important to look at each strategy you've got and find the market conditions in which that strategy performs well. If you've got a trend following strategy on the long side, it makes sense to trade that during a bull market, but it probably doesn't make sense to trade that during a bear market. If you've got a system that short sells weak stocks, it probably makes sense to trade that in a bear market and turn it off during a bull market. Broad market conditions can drastically shift the edge in your strategy. And this is so significant that the other day I ran a backtest on a system and it looked unprofitable until I added a regime filter that showed that it made real money during a bear market but lost money during a bull market. So that just shows you that broad market conditions have a huge impact on trading results. Lesson 23 is that you don't need to predict, you need to respond. There's lots of people out there in social media that try and make a name for themselves by predicting the market. That's a fool's game. If you have systems that respond to what the market does, you're much more likely to make money. Guessing what the market will do is never going to work real long term. We don't have a crystal ball. You might be right occasionally, and that might make you think you've got some predictive powers, but I'm telling you, you don't. If you did, you'd already be a billionaire and you wouldn't be watching this video. So rather than trying to predict what the markets will do, design good systems that will survive and make money regardless of what the market It does, you'll be much better off long-term. Lesson 24 is that discipline is a skill you have to build, not a trait that you have. By monitoring how you run your trading each day, have a step-by-step process, tick off each things that you do, reward yourself when you do every step of your process flawlessly, that builds discipline. When you have ideas, you write them down, you give yourself a pat on the back. When you notice something interesting about the markets, Note it to investigate in your trading journal later. These elements of trading discipline are things that you can build over time. If you feel like you're not a disciplined trader, that's okay because you can work on that and you can build that skill. But if you stay undisciplined, you're not gonna be a trader for long. You're gonna blow up and lose your account. Lesson 25 is that your trading systems should be making your decisions, not your emotions. You've tested your systems and put them in place for a reason. If you're emotionally overriding those systems, you're not gonna get the performance you hope for. You're gonna lose your account. You're gonna have massive drawdowns at the very least. Trading systems are what keeps you in the game because they keep you consistent. Even when it feels scary, the system is gonna act unemotionally and according to its design. Lesson 26 is that you have to implement. You can't study and watch videos and read books and backtest systems and expect to become an expert trader. You need to actually put in place what you've learned, because in implementation there's more lessons that are going to come up which are really important. That's why in the Trader Success System I teach a small concept and then have my students implement it, and then teach the next concept and have them implement it, and we build up the trading piece by piece into a complete systematic approach. You've got to implement and learn lessons from trading live. The trick is to do that at small small risk, small scale, so that you don't blow up early in your trading career. And also starting off with a complete system that is actually profitable really helps, which is why having someone to guide you makes those first steps so much easier in the market. And finally, we come to lesson 27, one of the most important lessons of all, and that's to think higher level. If you're looking at your trading account obsessing about each individual trade, you need to raise your thinking. From the trade level to the system level and start working on improving your system. And if you are focusing purely on one system, you need to raise your level of thinking and start thinking about a portfolio of systems. When you obsess about an individual trade, you're trying to make money on each individual transaction in the market, and that's driving you to try and be right, which is driving you away from profitable trading. When you move up to the system level, you start thinking about following the system and maintaining discipline and generating the expectancy from that system. When you elevate above the system to the portfolio systems, you start thinking about diversification and capital allocation and combining strategies together that make money in different market conditions. So elevating your thinking from trade level to system level to portfolio level is what will make you a truly great trader. And that's why I say you're only one system away because one system will get you away from that idea of being right on this trade. Trade being so important, which it's really not. Being right on this trade is gonna lead you down the path of loss-making and frustration. But implementing a system well, it's gonna lead you to the path to massive wealth and profitability. And if you've already got a system, then you're one system away from a portfolio that is gonna really improve your results. Adding the right system to your portfolio can really smooth your returns and help you make much more money long-term with much less stress. Stress. And if you've already got a big portfolio of systems, then you might just be one system away from plugging a gap which causes you sleepless nights or causes you uncomfortable drawdowns in your portfolio. So you're only one system away, and that's why I say that all of the time. So my name's Adrian Reid. Those have been 27 lessons that I wish I'd learned earlier. Hopefully you've got something out of that. If you've got any questions, comment below. Go to enlightenedstocktrading.com/feedback free to get more free trading education and start your systematic trading journey today.