LTCM story, but were they pro traders really, or academics that stumbled onto the wrong playing field? They also doubled their use of borrowing power when they returned half the money to their clients and kept the same position sizes on..... sort of like pro mistakes on steroids at that point :eek:
I think that the biggest mistake that the 'pros' make is not adapting their strategy for size. I know that the standby example is LTCM so I will use that... Find a winning strategy, perfect it, make LOTS of money, get more and more client money, moral hazard kicks in, add some leverage to your clients money, keep trading the same strategy. LTCM got into trouble because they had to keep finding new markets to spread, putting on bigger positions all the time and eventually their SIZE took them out. Adapting to your current size is the key to going from noobie to pro. And I would know... Ive been at this for months!!
<i>"somebody who (like me) knows quite a lot about psychology..."</i> I know a little bit about that field myself. It's interesting to see the same human flaws = characterisitics = traits demonstrated in all fields, all walks of life across all levels of income and net worth. There can be a monumental difference between potential profits and realistic profits in trading. The more complex a method or approach, the wider that gap usually is. One thing to look back in history, be it thirty seconds ago or weeks ago and see where all the correct trade decisions were. It's quite another to see correction trade decisions <i>at the time of action or more importantly, just before time of action beckons</i>. Complexity kills in this profession. We are taught that more is more. Problem-solving skills are developed to assimilate massive input of data to arrive at correct conclusions. Weigh all the evidence before deciding. That concept may work in a court room or scientist's lab, but it fails miserably in trading. Intelligent people naturally lean on their intellect as a protection mechanism. In trading, they tend to create a rocket-science approach. The fewer people who can understand it, the greater likelihood of its existing edge. If so many people are failing at a task, the obvious reason is they aren't looking at enough information. Pile on more data until the intellect can solve the latest puzzle. * Sooner or later, truly successful traders realize more is more. There are some amongst us here who can look at a naked chart, nothing but price bars and use that info to make consistent profits. Drawing tools and indicators only make it easier to measure price action. Too much of that clouds the picture. One of the mistakes experienced traders avoid is complicating things. Always try to see price flow clearly and with least deliberation possible. Most pros have very plain charts. Most aspiring traders have very messy, cluttered charts.
That is difficult to do & takes time, I struggle with brain interference instead of simply looking at price in relation to something as simple as a moving average. Sometimes I wish my IQ was a few points lower lol. I think it is not that difficult if we just learn to observe price behaviour. You have a daily range of high and low & a moving average, if price stays above the average & does not break the day's low, then it is simply a matter of having faith, that the market will continue advancing, otherwise the low would have been broken & average would start changing direction also. I think professionals simply develop the discipline to only trade statistically proven formulas & also very importantly know how not to be shaken out of a trade, that is what the majority of amateur traders lack.
Several mistakes of professionals are: 1) Not acting on perceived opportunity 2) Not holding trade to a perceived target There exists a common axiom that professionals go broke by taking small profits.
everyone makes mistakes, including the pros but the pros have many advantages so their mistakes have not so much influence on their trading results (profits). They have experience, they are well capitalized and have low transaction costs. Pros don't mind paying extra for a fast, reliable execution platform because this will reduce slippage (trading costs). Think about it: How hard it's for an experienced pro trader to win consistently one or two 1 tick moves a day in let's say ZB. $35 a tick - $1.50 in trading costs X 100 contracts (size)? A what are the chances for a newbie trader with his $5k account trying to get a perfect entry from indicators on his lagging charts? He has to put a tight hard stop and most of the time is stopped out and eventually the account is wiped out.
new trader with $5,000 trading futures - titanic, if I was a broker then I would accept accounts only from people with limited capital & sources of income & new to trading, I would lure them with tiny margins & low commissions, serious traders I would turn down with high commissions. I will live happily ever after on margins alone + commissions.