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September 26th, 2006 
Jason I was going over the “My Errors” totals recorded in my ScalpRate Spreadsheet and I realized that I had left a VERY important calculation off.
Avg Daily PnL Per Error : (Calculated by multiplying for each error the Avg PnL total by the # Trades Avg total)
I looked specifically at the ‘Grand Total’ column and then converted this total to R-Units. Here are the highlights of what I discovered by doing this simple calculation:
Stay2Long: -.58 R-Unit/Day
Inadequate Breakout: -1.01 R-Unit/Day
Pre-Conceived Notion: -.67 R-Unit/Day
Those are the top 3 most costliest recurring errors in my trading right now and how much they cost me on an average day. While there is some overlap (as I might enter a trade because I have a PcN, and then subsequently compound errors by Staying2Long in hopes that I’ll be proven right), I’m giving up 1.00 R-Units/Day minimum to these 3 errors alone…What difference; especially when my Net Daily Goal is a profit of +1.1 R-Unit/day.
So I thought that it’d be interesting to do a quick analysis of these mistakes, what they mean, and what I can do to try and reign them in. Broadly speaking, each of these errors represent some of the 3 of the 6 biggest hindrances to all traders: Fear, Hope, & Pride (the other 3 are: Greed, Impulse Control, & Ignorance…With the opposite of ignorance, or Wisdom/Knowledge, being the master key to curing all 6). All are related and feed off of each other…but that’s a whole different post…
Staying Too Long : Represents Hope & Pride
Inadequate Breakout: Represents 2 things really: Fear of missing out, & Lack of proper Impulse Control
Pre-Conceived Notion: Represents Pride & Ignorance
As Dr. Phil loves to say: “You can’t change what you don’t acknowledge.” And it is up to each of us to figure out what our personal trading demons are and slay them. So objectively speaking, I have to admit that my biggest (and most costliest) demons are a fear of missing out which is compounded by lack of proper discipline to sit on my hands.
And if I have a Pre-Conceived Notion about which direction the markets should go (big difference here between “should” & “may”), then that only erodes my Impulse Control further and heighten’s my fear of missing out. Then when things turn against me, all these psychological investments that I have made in the trade damage my Pride and instead of taking the hit and regrouping, my ego responds with its last line of defense, Hope.
Thus you can see how all the major hindrances are linked and feed off one another. Inadequate breakout is the costliest error for me because of all the other mistakes that I make AFTER that one. We all make entry mistakes once in a while, but do we cut them off immediately or do we toss our hands up & wait and see how they’ll turn out only exiting after a certain pain threshhold is crossed?
I could go on forever on this subject of Error Recognition, Tracking, Analysis, & Correction as I truly believe that this process of self-discovery is THE single most important task all traders face, but if I make this post much longer, noone will read it :-) So I will end it here for now with a better understanding of myself (and those parts I’d probably rather not acknowledge but know that I must if I am to be able to continue and grow as a trader).
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in the hope of finding a solution to our common problems. have you researched the possibility of adding a volume filter to breakouts?. on daily charts ibd has its 1.5 normal value criteria. in daytrading there must be an equivalent. lbr talks in terms of volatility and of selecting those stocks which have been “annointed” during the present quarter. also seasonality plays a part. i find the same problem with breakouts as you do. i have pondered how trader x can wait until a fib extention is reached, it does not work for me, the midpoint, is more often reached. i’m curious to find out how you intend to solve that problem, in today’s markets. we are reaching a 5 and a half year high and follow through is nowhere to be seen. something is amiss. wish i had the answer.
Leont,
In day trading I play trading ranges & breakouts very very carefully as fakeouts are much more easily manipulated and frequent. When I am referring to an “Inadequate Breakout” it is really my catchall term for “There wasn’t enough here to warrant the entry I took” (Be it a breakout, channel breakdown, divergence, fade, etc…)
Volume is important when dealing with any move and can be very telling. In my swing trade analysis it plays a much bigger role than in my day trading but it comes into play later on in the process as I do a Top Down approach (Market–>Sector–>Stocks–>Setups(of which volume plays a role).
My plan to solving the problems I face involves seeing where and why I am making plays that run counter to my trading plan. What I’m often noticing is that I am becoming myopic in my view of a particular indicator to the neglect of others…Almost all of my worst entries have this common denominator. But given enough awareness, time, and effort, I’m confident all of these hurdles can and will be overcome.