The new trader that finds Wyckoff Volume Spread Analysis (VSA) early on is lucky. Working with the real force behind market movements will save years of unknowingly being manipulated by the market makers.
But they still need to be aware of the common trading mistakes that lie like traps on their path to success. Failing to prepare is preparing to fail, so read on for some tools to add to your tool box for trading success.
1. Not having a trading plan or not sticking to the plan you have
Trading requires us to know and avoid our reflex judgements and actions. A trading plan puts a structure around these so that they don’t hijack you, leading you to revenge trade or turn a winning trade into a losing one.
A trading plan helps keep your ultimate goal – saving for your retirement, a house, your children’s future - in mind, easily lost in the minutiae of the process and the heat of the moment.
Once you’re out of the demo account the unexpected will be coming at you from all angles but the stakes are higher, causing a newbie to lose focus, act on impulse.
Having a plan and sticking to it are two different things. The changes in confidence that accompany winning and losing streaks can also lure a trader into deviating from the plan and cause their analysis to be biased in an unhelpful way.
Trader action points:
- Use stop loss orders.
- Don’t stray from your plan because one trading session went against you. Complete your trading diary, analyze the learnings, and adapt accordingly.
- If you constantly stray perhaps your plan doesn’t really match your personality, lifestyle, preferred trading style or level of interest in your target asset class. Be honest with yourself, and, adapt accordingly.
- Look at the statistics you’re accumulating in your trading journal. Gut instinct helps with many things in life but not this. Do you sometimes want to go with your gut not your plan for that one trade? Resist the temptation.
2. Being overly influenced by the media and herd activity and not thinking in a contrarian way
The markets are really moved by the professionals who manipulate the market up or down to suit their trading strategy. This can be by them influencing the news about a sector, company or product, whether it’s directly calling a news reporter with a ‘tip’ or asking a rogue question on an earnings call. If you don’t believe us, check at Mad Money’s guru Jim Crammer talking about this about 8 minutes into this video.
Sometimes it’s more indirect. For instance, when the Deepwater Horizon oil spill happened in 2010, all the news about the company was bad. This was a golden opportunity for the smart money: they buy when the news is bad and price is low and sell when the news is good and price is high.
Trader action points:
- The good news is that the one place the pros can’t hide their market manipulation is a price chart. Read the charts objectively. If you know what to look for you can trade in harmony with them. It’s often contrarian.
- Make sure to look at events and opinions from all angles. Be a detective. Take the 50,000 foot view. Take a look at this famous advert for UK newspaper, The Guardian, from the 1980s for a good visual representation of why being too quick to accept one explanation is a hazard.
- Ask yourself why someone would be saying something. If they genuinely have a tip that would make millions, are they going to talk about it in public?
- Educate yourself about the natural process of reduction that happens even in the best news outlets. Life is complex and nuanced and the constraints of news or online coverage mean that the high-resolution version can’t be transmitted. In addition the modern media landscape means there is a rush to the bottom as this video explains.
Be wary of letting the news influence your actions
3. Trading into the news
New traders often think that the news provides an opportunity for profit taking. But it isn’t the news itself that is important, it is how the market reacts to that news.
No one can predict with sufficient accuracy on a repeatable basis how they will perceive and respond to the news.
Price can react to current affairs in so many different ways. How it reacted in the past doesn’t guarantee it will do the same when a similar event occurs.
You might not be able to react fast enough to get out of a losing trade before a big sum of money is lost or you rush to get into a profitable trade and end up chasing price.
Trader action points:
- Stick to the charts not the news bulletins and analysis. Let the price/volume/range equation govern your actions not a political development that affects the market dynamics of the commodity or company you’re tracking.
- Stick to your trading plan. Don’t let the news clutter your mind, lead you to overtrade or make avoidable trading mistakes, or gamble.
- Avoid events on the government calendar like central bank interest decisions, employment indices, GDP announcements, government monetary policy decisions, for instance the FOMC (Federal Open Markets Committee) in the USA.
4. Hopping on the first bus that comes along
Professional traders know how the human mind works. They play on the uninformed trader’s emotions. They understand that traders are hungry for results, are time-poor and impatient. They know the human brain prefers round numbers.
Tom Williams, inventor of Volume Spread Analysis (VSA), likened it to waiting for a bus. You have to be patient and wait for your particular bus to arrive. It won’t work if you take the next bus that comes and end up at the wrong destination - this is one of the biggest mistakes new traders make.
Trader action points:
- Use automated trading alerts to tell you that entry or exit parameters have been reached. This stops you from being tempted to watch price fluctuations and then make an ill-advised move that is against your long-term strategy.
- Avoid using market orders which opens the door to selling at whatever the going price is. Instead use stop limit or limit orders which can be executed by the trading platform without you constantly monitoring the price as you would have to with a market order.
- Log out of your platform whenever possible as you may get distracted from your strategy by the price fluctuations.
- Don’t let bumps in the road today rock your long-term focus on your overall goal. Short term, anything might happen, but as long as you are following your strategy, continuously learning about your own behavior and working on ways to be more of who you want to be, then you’ll be ok.
The importance of timing in trading can't be overstated
5. Holding on too long and letting go too soon
Tom Williams also said the trend is your friend and trends tend to go a lot longer than you think they will.
This means it’s important to stay in a winning trade longer than your instinct might suggest and get out of a losing trade sooner than you’re inclined.
Behavioral Finance research has found that investors tend to sell assets that have increased in value and sell those that have dropped.
Be guided by your risk/reward ratio as to whether a trade has gone against you. If it has, don’t hold on to it hoping it will change, that you can ride out a downturn in the market. Set aside emotion and thinking errors and exit the trade as soon as possible. If the tap is leaking, cut the water supply asap.
Trader action points:
- To avoid an early exit you can use a trailing stop loss, where a maximum value or percentage of loss can be set. If the trade moves in your favour, the stop price moves with it but if it moves against you the stop stays put. If you’re losing you won’t lose more than you want to, if you’re winning the gains are left unfettered. Read more about them here.
- VSA methodology and tools alert you to the end of a trend. Smart money operators don’t signal their distributions or accumulations but our SMART Technology scans the charts and looks for trend alignment and VSA principles and when it identifies a high probably setup it will send you an alert.
- Compare each setup with your trading strategy – if key pre-requisites aren’t met then don’t make a move. You might want to develop a checklist for this.
Summary: It's the usual suspects
Once again trading success is a mixture of good trading practices (for example, using stop losses and your plan and journal effectively) and mindset (being patient, not letting your focus get distracted by extraneous information.
We’ve got lots of resources on these factors on our website which will help new traders avoid common trading mistakes. We will also cover them all in our Autumn Trading Academy, which is aimed at anyone wanting to make the most of Wyckoff VSA trading systems to increase profitability and consistency.
Tradeguider is the home of Wyckoff Volume Spread Analysis (VSA). Our proven trading methodology and semi-automated trading system help traders of all types and styles improve their consistency and gain an edge over competitors. We don’t know of any other trading software provider that has put together rules-based trading strategies built around their system. Our Wyckoff VSA trading experts have stress-tested the strategies and we frequently live trade with real money using them, as you’ll see from the Tradeguider YouTube channel.