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Traders using a system need to learn to avoid some of the associated pitfalls that can seriously detract from the success of their trading business.
Perhaps the most important such pitfall is failing to follow the trading system properly and under all suitable trading conditions.
Some additional common trading errors or pitfalls that can arise from failing to follow a trading system are discussed further in the sections below.
Pitfall 1: Not Entering a Signaled Trade
A trader might refrain from entering a trade suggested by his system perhaps out of fear of losing money or because he was inattentive to the market or to his system’s signals.
No matter how it arises, the failure to take a trading signal — especially if this error arises frequently — can seriously undermine the success of any trading system.
By failing to enter a signaled trade, a trader could be missing out on a position that could have earned him significant gains and that could have compensated previous losses. And the same applies to closing opened trades.
Pitfall 2: Entering Trades Based on External Factors
When a trader selectively only enters trades signaled by his system that are exciting or that emotionally appeal to his in some way, the success of his system can be further undermined.
Also, when traders base their trading decisions on the recommendations of others or on other types of suggestions coming from outside their system, this impulsiveness can often lead to poor trading results.
This is especially serious when the recommendations do not include important risk management factors like Stop-Loss levels and suitable exit points when the trade is profitable.
Furthermore, whenever a trade is based on external factors, this allows a trader to blame the external influence, rather than himself, for any losses that might occur. This can lead to the trader falling into the very poor habit of failing to take responsibility for all of his trading decisions which can further undermine his trading business.
Pitfall 3: Not Placing Stop-Loss Orders
Some traders fail to enter their Stop-Loss orders into the market and instead keep Stop-Loss levels in their mind while they watch the market.
Unfortunately, these levels can easily be exceeded in fast markets, potentially leaving the trader with a worse loss than he has anticipated or can afford to take.
Furthermore, mental stops can be far too easily missed by either forgetfulness or inattention on the part of the trader. No matter how brief the error, it can have serious consequences for the trader’s account and also for his self confidence when trading, as he will have no one to blame but himself.
You can avoid this pitfall by remembering to just enter the order into the market wherever your trading system indicates a Stop-Loss level is appropriate.
Pitfall 4: Trading Too Many Systems
Another trading pitfall that can arise when following a trading system is attempting to trade too many systems at once.
Many profitable trading systems already exist or are just waiting to be developed, but watching too many of them at once can easily overcome a trader’s ability to focus and maintain the necessary discipline required to trade them profitably.
Also, while some systems work better in certain markets, switching between multiple trading systems can also become confusing, so aim for simplicity as much as possible when developing your trading plan.
Pitfall 5: Taking Too Much Risk
Traders need to avoid the temptation to take positions that are too big for their risk tolerance. They first instead need to assess rationally their risk profile based on their funds available for trading and then only select trades with a high probability of success based on their trading strategy.
Furthermore, having too much invested in one trading position can affect a trader’s judgment, as well as produce poor results if the trade results in a loss.
Such losses then mean that insufficient capital might be available to take advantage of subsequent trades that would have had much better eventual results.
