So far we have seen inherent character issues of a trader that work very well in the outside world but sets up the trader for failure in the trading world. These are character issues built over years and are hard to shake. However, with careful planning of rules and discipline, a trader can avoid triggering them. For example, entering only on or after the breakout beyond the signal bar, we can prevent a trader's bargain hunting behavior from causing losses.
In this post we look at a complementary part of the trader's mind, his reactivity to the market. When a trader is watching the market and is expecting a big move up, he is disciplined and waits for a good signal or pattern. Bar after bar forms and the trader chooses to pass up since they do not meet his criteria. Suddenly out of the blue a large breakout bar occurs and the trader is caught unprepared, he simply cannot stand idly by as the market apparently is shooting up. He gives in and buys way above where he would have bought if the bar was acceptable. The market promptly stops him out in a deep intra bar pullback and either fails or resumes its march up.
This is a familiar scene many traders have played over and over. When the market moves in a way you did not expect and you feel forced to act, you are likely to make a mistake. Even if you are not stopped out, if the bar starts pulling back, your confidence will be weak because this is not a trade you have taken many times and is not a natural setup and management for you. Your mind is very vulnerable to making several mistakes at this point. One way to handle this is to realize that a weak breakout will fail and a strong breakout is likely to break into a trend and the first pullback in the trend is a far better entry.
Another classical reactivity is to a prolonged channel. You see a heavily overlapped or other poor setup in a channel and take a trade and are stopped out. You enter again and again, trying to get it right this time and lose several times before you can finally enter it just right. This leads to a phyrric victory, since your gain from the winning trade is unlikely to be larger than the accumulated losses. Traders often "persist" since they know that the direction is right, they just need to figure how to enter the channel correctly. Unless you want to fade counter-trend entry bars and scalp, the only reasonable way to enter a channel is to wait for a an attempted break of the channel or wait for the channel to break into a trend.
Realize that being right about direction is insufficient. Trading chatrooms are full of traders predicting an up or down move accurately, without being able to find a good place to enter with a tight stop. Entering with a wide stop may allow you to enter nearly anywhere but such trading carries the risk of large drawdowns and is unsuitable for new traders. Patience and the willingness to sit out until your setup appears is paramount to consistency.
In the world outside trading, persistence and chasing your dreams may be great characteristics. For trading, patience and discipline are far more important.