Not Having a System
Some traders make trading decisions without any methodology or system. Imagine yourself on a trip in which you intend to drive to the west coast. If you don’t study the route to take, where to rest, or you don’t even know what cities or villages you are going to pass by, you will probably end up in the east coast, or on the north border, but most importantly you won’t know in the middle of your adventure if you are on the right path. On the other hand, if you know the route to take, villages and cities you are going to pass by, you will know you did something wrong should you drive into an unknown village. At this point, you will review your route, turn around and get on the right route.
The same goes for trading, if you do not use a system or methodology you won’t know what you are doing wrong until it is too late and your trading account is in great danger.
You cannot get into a trade because you think or believe the price is going to go up or down. You need a plan of action, a trading plan that will get you in and will guide you through each trade.
Imagine a trader at the end of the month; her trading account is up, the best month ever. Then she decides to go back and review all the trades made during that month. When looking at the trades she realizes there is no possible way to replicate those results because all of them were entered without any system what so ever, in a word, randomly. In other words, she got lucky. The same goes when everything goes wrong, she will not be able to discover what she is doing wrong because she is not following any system.
The most important thing about having a system is that all the rules that govern it were made when there was no money at risk. This way you are sure that every decision taken based on the system is in your best interests. These decisions are not clouded by psychological factors (fear, greed, hope, etc.) that are present when real money is at risk.
You need a system or methodology.
This will help you realize whether what you are doing is right or wrong. It will also guide you through each trade. We all make mistakes occasionally, but recognizing them gives you a chance to study, learn from and work past them. Remember, the only way to get consistent results is by strictly following your trading system.