3 Key Trading Barriers and How to Overcome Them


We’ve all faced disappointing trading results. If you’ve been trading for a while, you must have encountered barriers.

You start to realise that you always get stuck with the same issues and repeat the same mistakes.

As it turns out, trading is about overcoming barriers.

These are 3 key barriers most traders encounter. Unless you get them out of the way, your path to trading consistency is blocked.

Use the tips below to overcome each barrier and move closer to your trading target.

Trading Barrier #1: Insufficient Financial Capital

Let’s use a broad definition of capital. Capital here refers to your financial capital, not just what’s in your trading account. It’s your entire net worth.

Think of the successful traders you know. How many of them started out with no savings and just $500 in their trading account?

Probably none.

All successful traders I know started with a sizeable trading account. On top of that, they have a comfortable amount of savings funding their daily expenses.

Being well-capitalised is a more than just an advantage for someone who wants to trade for a living. It’s a prerequisite. You must be well-capitalised to trade for a living.

An under-capitalised trader is severely disadvantaged.

With less capital, you are less likely to survive drawdowns of your trading strategy.

All strategies have drawdowns. Consecutive losses are inevitable. To trade successfully, you must have enough capital to weather the drawdown. If not, you are more likely to fail.

With less capital, you are more affected emotionally by your profits and losses.

Your emotions are tied to every bit of market fluctuation. You get fearful and greedy easily. More likely to fail.

With insufficient capital, you are more likely to ignore risk and over-trade.

If you need your trading profits to pay your rent, you are more likely to take on excessive risk. You are more likely to ignore your risk management rules. More likely to fail.

Let’s say your only source of income is from the market and you do not have much savings. You will definitely feel the pressure to make money from trading every month. You will constantly feel that you need to trade. As a result, you will over-trade.

Everyone talks about the importance of trading psychology. Every trader agrees on the need for discipline and emotional control. Yet, the link between trading psychology and financial capital is neglected.

If you find that you are:

  1. Fearful
  2. Overtrading
  3. Ignoring your trading and risk management rules

Think about their root cause.

Is it because you do not have enough capital? Are you aiming for an impossible ROI under financially stressful conditions?

How To Overcome the Lack of Financial Capital

Don’t risk your trading capital unnecessarily. Learn how to trade in simulation or with the minimum position size while you save up.

Some traders oppose simulation trading. This is because it does not offer the same level of emotional training as live trading.

It does not. But having more initial capital gives you a higher chance at success. It gives you a greater buffer to deal with your emotions when you start trading live. And since simulation trading helps to conserve your financial capital, I say go for it.

Have at least 2 years of living expenses in your bank account. 2 years is just a guideline. Remember the goal. You want to remove financial stress from your day-to-day trading. Put aside as much as you need to in order to feel financially secure.

Keep your cost of living low. Having fewer expenses to worry about leads to better trading decisions. Also, even if you are successful in your trading, your profits are likely to be volatile. A low cost of living helps when you hit a tough spot in the market.

Work as you trade. If your trading method allows, work another job. Having an extra source of income is the best way to relieve financial stress.

For me, I’ve saved up for a few years and adjusted my lifestyle down before I started trading full-time. This helps to remove the financial pressure from my trading process.

I find it easier to focus on taking the right trades when I don’t have to worry about my monthly trading profits.

Trading Barrier #2: Inability to Think With Probabilities

We are brought up with concepts of certainty.

  1. If you study hard, you will do well in your test.
  2. If you come to work, you will get paid.
  3. If you work longer, you get more things done.

Yet, to trade well, you must embrace uncertainty and probabilities.

You need to accept that the world is not black and white. It’s gray. And there’s infinite shades of gray.

A right trade might lead to losses. A wrong trade might lead to profits.

Taking one trade might make you money. But taking three trades does not mean you will make more money.

Spending more hours on trading does not mean earning more. Spending less time might mean losing less.

Traders who understand probabilities will not regret taking a losing trade. They wear their losing trades like a badge of honour, as long as they’ve followed their trading plan.

If you don’t understand why a losing trade can be a correct trade, you do not understand probability.

How to Overcome the Inability to Think With Probabilities

Learn to evaluate decisions using the information you have when you make them. Do not judge your decisions based on their outcomes.

The relationship between decisions and outcomes surfaces only in the long run.

This is a tough one. This is why most traders fail. Most of us underestimate how difficult it is to think in probabilities.

Luckily, there are some great books to help us. They cover the role of randomness in our life and the probabilistic nature of trading.

Read these books:

  1. The Black Swan
  2. Fooled By Randomness
  3. Trading in the Zone

You need to start thinking in terms of probabilities in your life. It’s a whole new perspective that’s completely opposite of what’s hardwired in our brains.

You need plenty of time for it to sink it.

Trading Barrier #3: Lack of Focus

Regardless of your market approach, you need to study the markets and try to improve over time.

This means that you need to track your observations, trades, and results over time. You need to find out what’s working and what’s not. You won’t find out the answers overnight. You must gather data, research, and observe over a long period to arrive at conclusions.

This is why you should not keep changing your trading strategy or key parts of your trading plan. If you do, you cannot derive any useful conclusions.

To find your trading edge, you need to focus.

Yet, many new traders do the opposite.

The typical new trader might try out fundamental analysis. Hits a losing streak. Tries out VSA. Hits a losing streak. Gives up. Tries out a fantastic new Stochastic strategy. Hits a losing streak. Gives up. Heard that selling options provides regular income. Tries that. Hits a losing streak. Gives up.

Well, this story can go on forever.

The point is that you will not make real progress in your trading career until you start to focus.

It is okay to explore and learn about different markets, instruments, strategies, etc. This is essential to build your trading foundation and to understand your options.

But you must know that you start to make real progress only after you specialise.

All the Market Wizards specialise in something. Even if they seem to dabble in many markets, they started out by excelling in one market using one approach.

How To Overcome the Lack of Focus

Stop chasing the next trading book, forum guru, or online course. You just need one that makes sense to you.

Then, you can stop your search and find your own path to success.

  1. Choose one market.
  2. Choose one strategy.
  3. Decide on a review criteria. For instance, review every 30 trades over at least 30 trading sessions.
  4. Improve your trading plan based on your review. Avoid drastic and frequent changes.

This process can get boring. Along the way, you will get bored and get tempted to try out a new strategy. This is precisely why it’s so difficult to trade successfully.

Conclusion

There are many other barriers to trading successfully. But these 3 barriers cover a few important aspects of trading for a living. If you can overcome these 3 barriers, you are much closer to becoming a successful trader.

Tackle these barriers one at a time.

But don’t blindly pick a barrier and get started. Take a step back. Take some time off from trading and reflect on your trading experience. Figure out which barrier is posing the greatest problem for you.

Start with that.

Concepts and Examples of Algorithmic Trading

US Posted a Negative GDP Figure for the First Time in Three Years – Forex Trading News – May 30th 2014