Avoid These Common, Costly Trading Mistakes

I'm here with Scott Andrews of master the gap Scott thanks for joining us thank you well with your gap trading strategy you've seen students make mistakes you've made mistakes I'm sure in executing the strategy can you talk about some of the most important ones do you think that people should avoid oh sure as you can see here on this slide there's at least 12 that I've identified in sort of grouped most of these quite frankly were mistakes that I made as well in my early days and I've named them to help me remember them to make sure I'm not the shooter today or I'm not the news junkie today but also when I work with folks it's real easy for me to see what type of personality they are and and what kind of mistakes they're probably making so we name them and I have a little fun with it that the first one here is the shooter and this is the person that knows that historical probability of all gaps filling is about 70 percent right so why wouldn't you want to trade all of those things catch seven winners out of every ten trades that sounds great in theory and reality if it doesn't work quite that well because you have to use a stop you start using a stop and all of a sudden you're not making any money so I like to joke the the shooter it's just so gung-ho and catching all those winners because it makes them feel good they don't make any money because and they actually end up shooting all their bullets they get eaten up on transaction cost and it generally doesn't work out well so the question then becomes how do you know which of these trades to take what to fall into that 70% of the ones that will fill a great question I used to play them on myself and I shot a lot of bullets and I ran out of my bullets so I started doing a lot of historical back testing to determine which gas had the best probability of filling and I use a real simple concept based upon gap zones just a term I used to describe where a gap is occurring in the morning relative to the prior days open high low and close prices take those four lines that makes five zones and that's a starting point for my gap strategy let's talk about some of the other mistakes that we can hopefully avoid sure the competitor and most traders that I I know are intensely competitive some are more extroverted somewhat more introverted but deep down we're all highly competitive people and as you can see here on the slide they're more focused on win percentage and not on profit expectancy you know actually making money because it feels good to have to be a winner right you know a competitor wants to be a winner we tie it to our self-esteem and we sleep better at night when we feel like a winner but over the long haul and believe me I've gone down this path in our desire to become a winner especially as a gap trader because you're trying to capture that nice big move that tends to flush fairly quickly they've gaps filled within an hour hour and a half on most cases and our desire to do that and be a winner we end up scaling out at early targets like a half gap fill and we increase our stop size because if we use a bigger stop size you're a little bit more wiggle room you'll catch more of those winners so if you think about it you're gonna be eating like a mouse as they say and defecating like an elephant so that doesn't work well so as I like to tell it remind people the competitor the ultimate competitor is the one that makes money not that just wins a bunch I think we have to have for one more down below you'll see the myopic and that's the person that is judging success trade by trade or week by week I have a lot of people that come in we have a trading room and the follow us and or that even try new strategies we're gaps or not and they get so focused on that first trade or the first series of trades and they will throw the strategy out if they happen to have one or two losers in a row and that's just crazy if you think about it you know ultimately everything in the markets is driven has historical probabilities over time so if you have a winning system or a winning strategy the last thing you want to do is to try to judge it on the first three trades that's not a it's not statistically relevant and B it could be the worst thing you'd bet worst decision you've ever made now it's hard psychologically I recognize that it seems like to me when I increased my position size which I tend to do each year I used to increase position size after I'd had three or four winners in a row and I learned the hard way that that was not the right time to increase position size because I'd go through a series of losers right after that after I increased position size so it's it's hard you can't but you got to stick with your system and don't focus on the short term and focus on the long term thanks God for your time thank you you're watching the money show com video Network

Channel: MoneyShow

Views: 18,558

Rating: 4.8865247 out of 5

Keywords: trading, scott, andrews, common, mistake, error, gap, futures, market, trade

Id: jiJ08X3TbxQ

Length: 4min 26sec (266 seconds)

Published: Fri May 01 2009