Overcoming the IQ Obstacle 

Mistakes in Trading .Com

Overcoming the IQ Obstacle

Peter is at the Gates of Heaven. A long line of souls are waiting to enter. Peter is frantic. "Quick," says Peter to the first in line, "what is your IQ?" "Why, my IQ is 210," replies the first soul. "No, no, get out of line!" yells Peter. "You, what's your IQ?" he asks the next soul. "175" is the reply. "No, that's no good!" cries Peter as he continues to works his way down the line. "150," "130," "110" come the replies. But still Peter is frantic. Finally he reaches a poor soul whose reply to Peter's question is "my IQ is 75." "Oh, Thank God!" cries Peter. "Now quick, tell me, where did November Soybeans close today?"

This story gets passed along from one self-deprecating futures trader to another and everyone has a good laugh. The implication is that all futures traders are dimly lit. This is certainly not the case. However, there is one element of truth to this story that needs to be addressed: believe it or not, intelligence can be an obstacle to trading success. This is not to say that intelligent people cannot be and are not successful in the area of futures trading. All it means is that their intelligence can work against them at times. How so you may ask? Well, one thing that intelligent people do is to analyze things more deeply than others. In futures trading such a propensity can be a very dangerous thing.

Futures markets do all kinds of unpredictable things. They go up when everyone thinks they are going to go down. They go down when everyone thinks they are going to go up. They may have no reaction at all to a major piece of fundamental news. They may have a big reaction to a seemingly trivial piece of news, etc. None of which makes the least bit of sense. And therein lies the rub. Intelligent people like things to "make sense" to them. If something does not make sense to them then it needs to be analyzed so that an understanding can be gained. In futures trading trying to understand exactly why something is happening can be a costly exercise in futility.

Consider the following scenario. A person with an IQ of 200 is short T-Bond futures because he expects the next unemployment report to show a sharp decline in unemployment, indicating a stronger than expected economy. He believes that such news will cause interest rates to rise and T-Bond futures to plummet. He figures he will risk $1000 per contract using a mental stop. On Friday morning the unemployment report comes out and it is exactly what he had expected. The numbers are sharply lower. Our trader has nailed it right on the money. But there is one small problem. T-Bond futures have started to rally sharply. How can this be? Apparently a lot of other traders had been anticipating the same number and had also been selling short in recent days. Now that the bad news is out of the way and all the sellers have already sold, the buyers take charge and T-Bonds inexplicably shoot higher. Within two minutes of the report's release our trader is sitting with an $1,200 loss. And here is where intelligence becomes an obstacle.

The natural thing to do is to immediately begin mentally processing "why" this has happened. "I got it exactly right. How can I be losing money? What's going on here?" our trader might ask himself. And he will begin trying to make sense of a market that is rallying in the face of incontrovertibly bearish news. All the while his losses mount. By the time he finally pulls the trigger he has lost over $1,600 a contract. What should he have done? When he entered the trade he told himself he would risk no more than $1,000. Right after the news came out he was down $1,200. What he should have done was cut his loss immediately at that exact moment as he had planned to when he entered the trade. But because his thought processes forced him to try to make sense of things first he did not pull the trigger when he needed to. This type of scenario plays out all the time, which leads to the next bit of advice.

Categories in Trading Mistakes

Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor

Using too much Leverage
Determining the proper capital requirements for trading is a difficult task

Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure

Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader

Useful Advices to Beginning Trader
You can control your success or failure

All about Stocks
Encyclopedia about Stocks. That you should know about Stocks before starting

Forex Glossary
All terms about Forex market

MistakesinTrading.com, 2008-2015
MistakesinTrading.com - don't make mistakes in trading, be a good trader!