The Top Reason Individuals Fail Miserably in E-Mini Trading

I never know which e-mini traders in my program will succeed, and which traders will fail. Sometimes the very brightest, well-educated and stable clients, who you are confident will enjoy great success fail miserably and the quiet fella who just keeps plugging away will catch fire; and with the traders that succeed, I have never been able to predict when a novice will have that “aha” moment when the pieces of the e-mini trading puzzle fall into place.

On the other hand, deciphering why people fail is a much easier process. With a few exceptions, most unsuccessful e-mini traders fall into an identifiable group.

They are individuals who try to understand the market using logic and common sense. The market is a fickle beast; a massive congregation of opinion on the economy, economic statistics released by the government, strategies by large traders for specific outcomes, the list of variables that entail market pricing is large and new variables emerge daily as some other variables wane.

With that weighty group of individual variables mentioned, it has to be pointed out that, depending upon the source of your information, random buying and selling account for nearly 50% of the market movement; by random movement I am referring to non-institutional market activity by retail traders in smaller contract quantities, usually in odd lot orders.

Given the chaotic scenario I have just described, it would seem a challenging proposition to make sense of the whole thing. Our brains are programmed, in most individuals, to categorizing similar behaviors or observations into predictive pattern recognition. Hence, common sense and logic, which are integral parts of living anywhere near successfully, are the normative standard among right thinking people.

Unfortunately, the very cognitive mechanisms that make sane and secure life possible are the anti-thesis of successful trading. The markets are neither logical nor function in a manner that average folks would say resembles the attribute of “common sense.” It’s not unusual for the market decline on great economic news and rally on horrible economic announcements, which is counter intuitive, in a logic or common sense frame of thinking.

But there identifiable reasons for the direction market to one way or the other and they are often not based upon the sort of common sense of logic that a newer trader is expecting. For example, during the late summer and fall of 2013 the Fed announced that if the economy continued to improve, as it had, they were considering scaling out of the quantitive easing program that had to ballooned to 90 billion dollars/month. The market was very well-capitalized and trading was brisk and profitable, to the long side. Consequently, there was a general belief that the quantitive easing program was the catalyst in the surprising bullish run we have been experiencing since the fall of Lehman and the domino effect of economic catastrophe that ensued. As a result, good economic reports were met with powerful selling, as traders assumed the loss of the quantitive easing program would be detrimental to sustaining the aging rally; although certain sectors like housing (probably the most distressed and problematic result of the 2007-2008 “Great Recession) may well rally on good news as traders gauged the effect of housing less detrimental to the market than other economic reports. It was a difficult time to trade if you are trying to understand the market.

When I start work with a new e-mini trader, the first thing I point out is, “the set-ups and trade recognition are the easy part of trading, and ultimately your success will depend upon your thinking.”

The market has a “common sense and logic” component that is unique unto itself, and applying everyday common sense is a habit that many traders cannot shake. Often times, individuals who work with historical information (accountant, lawyers, etc.) find it very difficult to stop looking to history for today’s trading answers. The trades are always in front of you, and though some historical data can be useful, like support and resistance, the price action is generally evolving on perceptions of the future, not the past. In short, the markets are forward looking, with a nod to the historical data in the mix.

Often times, I watch traders rely on their common sense to trade and am unable to break out of that cycle of thinking. You hear utterances like “there is no possible way the market could have stopped me out,” or, “this thing is rigged, there is no way it could have moved against me.” You get the idea.

The point is simple; every great trader with who I have had the pleasure of working with had an uncanny sense of market logic. Learning this style of thinking takes some study, some time and experience to become learn, but the “aha” moment I described at the beginning of the article is a trader seeing the logic of the market. It’s music to my ears… On the other, for varying reasons some individuals never get to experience that “aha” moment. They know the set-ups, volumes of market trading theory and have the latest software programs. My experience is that these traders can have limited success in certain market conditions but generally slowly lose their trading accounts due to excessive losses.

It is my firm belief that good traders have a developed sense of market sense, and this one factor is critical success. It seems some individuals are deeply invested in historical verification in the decision making process and are unable/unwilling to change the way they think, and they fail.