Many traders know exactly what they should be doing, but still find themselves repeating the same costly mistakes. Michael Taylor looks at the mental loops that can hold traders back, and how greater self-analysis, better discipline and AI-assisted review can help break through them.
Having traded for a living for almost 10 years and worked with numerous traders, one of the things that I’ve found consistently is that people will hit a plateau and get stuck in a mental loop. Unless they break through, this will stop them from ever achieving profitability.
For example, I had the same conversation with one trader at least three times, potentially even four, before I suggested that there was no point working together further unless he could resolve this issue himself. As a coach, I can’t press buy and sell for him, and it would have been something that he would need to do himself.
The conversation would go something like this: he would turn up to our call and show a loser that he was running that had gone past his stop loss. I then explained to him the importance of cutting losses because if you can’t cut losses, then you can’t scale, and explained to him the numbers. At 20% down, you need a 25% gain to get back to break even. If you’re down 50%, you need to double and get back 100% before you even get back to break even. He said he understood all of this and would not make the same mistake again. The problem was the mistake kept happening, and it was a direct hindrance, stopping him from achieving profitability.
Another example was working with a trader on position size. The issue here was that he didn’t see the point in trading small because then it almost wasn’t worth it, even though I explained it’s far better to trade small and keep the losses small to extend runway and allow for data collection. I explained that you can always scale up once you are starting to show some traction.
When he traded with a bigger size, he struggled to stick to the stop losses because he was seeing the pound signs. I explained that with IG, you can now trade for free, and that back when I started, trades were around £8, which were a significant cost, so it makes sense to trade far smaller.
But he struggled to be emotionally invested in this. What would happen is that he would open the trade, and whilst he had no issue cutting losers, once it hit his take profit point, he would often run the position past that because he would look at the pound sign and think it wasn’t really worth it. Then, of course, the position would rally and then go back below his take profit point, and the trade would not be the trade that he had in mind before he even placed the trade.
So he couldn’t stick to the stop-loss and take-profit points when he traded too big, but he also couldn’t do it when he traded too small. This was a plateau that needed to be broken before anything could be scaled up. He was finding good trades with narrow, defined bases and clearly defined entry and exit points, but the issue was that he couldn’t execute on his intended plans.
Every trader hits sticking points that need to be overcome. For example, a big loss can mentally shake you if it is far more than expected. This is not just an occupational risk, but an occupational hazard, and something that will always occur every now and again. Perhaps a stock announces a profit warning and gaps right through your stop, or you just get unlucky and go through a string of losers repeatedly. Of course, the only way to protect against this is to position size for a 100% loss on every position, but it’s still never nice when you’re hit with a profit warning. For example, I had a narrow escape on a stock that begins with A (I can’t remember what it was called) and worked in currency hedging a few years back because the directors had bought, it had broken out, but I missed the entry. Not long after, it suspended and opened 95% down. One day, I’m sure it will happen to me, and I’ll need to be prepared for that.
However (and this is where ‘superintelligence’ can come in), it’s worth looking at your trading and seeing if you can notice any loops that you are struggling to break through.
Be honest with yourself and ask yourself why they are occurring. What are you doing about them, and how has that worked? This task will only be useful if you are ready to look at the data objectively.
One thing that you can do is download your broker reports and upload these into AI. Ask it to criticise your trading and see if any of the critiques are valid. If they are, you’ve now got a ready-made task to complete in order to improve your trading.
You can also task your AI to act as a trading coach and work through any psychological issues you’re having with your trading. Maybe you are trigger shy. Maybe you’re struggling with motivation, or maybe you’re struggling with taking profits and then seeing the stock ride higher.
As mentioned in my previous article, artificial intelligence is going to help retail traders significantly, but only if they’re able to use it objectively and are willing to do the work.
Trading is not easy, and we need to use every advantage available.
Michael Taylor
Get Michael’s trade ideas: https://newsletter.buythebullmarket.com/
Free educational content: @shiftingshares
This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.
This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.
