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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's 11 Trading Barriers

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Industrials (^DJI):
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Nasdaq (^IXIC):
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As of 10/19/2017
23,163 5.44 0.0%
9,887 -13.16 -0.1%
748 8.24 1.1%
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23,300 or 22,500 by 11/01/2017
10,300 or 9,700 by 11/01/2017
775 or 725 by 11/01/2017
6,700 or 6,500 by 11/01/2017
2,625 or 2,525 by 11/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

 

This article is based on a sidebar from the August 1996 issue of Technical Analysis of Stocks & Commodities magazine, in an interview with Robert Koppel, written by Thom Hartle, titled, "Psychological Barriers to Trading." I reduced the number of barriers because they were either duplicated or made little sense, and I added one of my own.

According to the article, Koppel and Abell, in their book, The Innergame of Trading, pictured on the right, discuss psychological barriers to trading successfully.

Trading Barrier #1. Loss: Undefined.

Before I make a trade, I define my upside target and also my stop loss price. "At what price would the market be telling me I'm wrong?" I ask myself. Some traders don't set profit and loss targets, and I confess that if the trade is rushed or if I have many trades to place quickly, I may forget to fill in my trading notebook where I describe the price targets.

The article makes an interesting point when they write, "If you are afraid to take a loss, don't trade." I would add that if your inner voice is telling you to avoid the trade, then do so. If you are always fearful that the next trade is going to be a loser, then that is another problem altogether. It may be that you don't trust your trading system, or you fear success. Figure out what the problem is and fix it.

Trading Barrier #2. Hesitation.

You receive your trading signal and then what? You watch it go by, believing that if you hold a bit longer, price will continue the uptrend or will soon change from a loss into a profit. You could be right...or wrong. One thing is clear is that you are ignoring your trading signals, and that is never good.

Plan the trade and trade the plan. If you set an exit price and the stock reaches it, then close out the trade either for a profit or loss. Taking a loss should be just as easy as taking a win. If it's not, then keep practicing until it is.

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Trading Barrier #3. Stubborn Beliefs.

The worst trades I make are those in which I know how the stock is going to behave. They are the a no-brainers, the trades so obvious anyone could make them. When the unexpected occurs, I sit paralyzed, unable to believe my eyes and unable to pull the trigger to exit. The loss grows, seemingly without bounds.

Now that I know about this problem, I try to examine all sides of a trade, covering how to adapt should the trade go wrong or price begin a dead-cat bounce.

Don't let your beliefs dictate your trade. Only price should do that.

Trading Barrier #4. Suicide Trading.

Have you ever been so mad at the world that you didn't care what happened? I remember approaching a day trading session in that kind of mood. I made unusually large and risky bets, but I don't remember if I was successful or not. Probably not. Now I don't trade if I'm upset, and you shouldn't either.

Trading Barrier #5. Euphoric Trading.

This is the opposite of the last one, but the results are often the same. How many times have you made trade after trade that wins? You feel invincible. When I feel as if I can't lose, that's when the market gets me as bloody as a CSI episode. I take a loss, often a big one.

Now I know better. When I have the euphoric feeling of invincibility, I stop trading.

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Trading Barrier #6. Missing Breakouts.

This one is not about getting into a trade well after it has begun its move. Rather, it is about failing to get into the trade at all. You watch price move from the sidelines.

I did that with Ashland (ASH). I correctly identified a head-and-shoulder bottom and added it to my watch list on March 17, 2009 when it was trading at about $7. Then I sat back and waited and waited and waited. Meanwhile the stock climbed and climbed and climbed. And each day that it climbed, I kept chanting, "I should have gotten in. I should have gotten in."

The stock hit 30.

Trading Barrier #7. Losing Focus.

When I started day trading, the light shining through the window always caused me problems. It was a distraction, just as my dog barking or the phone ringing.

When you are in a trade, keep the focus.

Trading Barrier #8. Being Right or Making Money?

There are a few traders I know that advocate scaling out (selling part of a position) on the first trade of the day so as to book a profit. They want a win behind them to set the tone for the day. But if you were to rephrase their style and ask them, "Which is more important, winning or making money?" They will answer "Making money," and yet that's not how they begin their day trading. They sell part of a winning position (increasing the win/loss ratio) instead of making more money by selling later.

They have a valid point, that of a psychological need to set a winning tone for the day, but I'll take the money.

If you scale out of a trade, check your numbers. Would you have done better if you sold the entire position at once or in pieces? A clue to the answer, at least for me, occurred during losing trades. If I sold the entire position, I kept more of my money than selling half and hoping I could recover if price bounced. I found that by scaling out, I sold at an even lower prices, compounding my loss.

Now, if I have a losing trade and want out, I sell my entire position at once. For winning positions, I almost always sell my entire position also at once. The only time that is not true is to reduce the position size to rebalance the portfolio.

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Trading Barrier #9. Inconsistency.

If you obey your trading signals some of the time and not others, then why are you trading using that system? You can't tell ahead of time which trade will be a winner and which one won't. Thus, you have to obey every trading signal that a system gives you. If you can't do that, then find a system in which you can.

Trading Barrier #10. Missing Money Management

The big one here is using stops on every trade, but it also includes the proper position sizing and sane use of leverage. I stopped trading the ultra ETFs because the twice leverage made me lose money as often as I won. I do better and feel more comfortable trading the 1x variety.

Money management is all about preservation of capital, of keeping those losses small and your profits larger. If you can do that, then you can probably make it in this business.

This year (as of mid 2009), my average loss is 9.5% but my average gain is 36.1%. One regret is the loss number is twice as high as it should be, but I have been trading inexpensive stocks which tend to be more volatile. They move more than 10% in one day. Wow.

Trading Barrier #11. Dollar Dependence

I added this one because it's a bad problem with an easy cure. What's the problem? You focus on the money. How many times have you said, "The loss is too big to sell!" How many times have you looked at your profits and decided to get out? I did that just the other day after a 110% gain in Conseco in five days. Turns out I sold the day price peaked, but the stock could have continued to drive higher.

I does not matter at what price you bought a stock. What matters is when you sell. Forget about profits and losses and concentrate on how well you are obeying your trading rules. You compound your stress when you look at the bottom line each day or after each trade. Instead, concentrate on whether or not now is the time to sell. If you can do that, then your stress level will drop and the profits will take care of themselves.

It sounds easy and it is, but one trader I know just can't accept it. He keeps chanting, "All I have to do is make a nickel on each trade." He is so focused on making money that he may never make it as a trader.

-- Thomas Bulkowski

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