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Foreword
For most traders the task of outperforming the share market is not
difficult; it the job of beating ourselves that proves to be the
challenge. By 'beating ourselves', we mean mastering our emotions
and attempting to think independently, as well as not being
influenced by those around us. Trading success based on an
emotional response to market conditions is due to chance, and
chance does not help us attain consistent results. Objectivity is not
easy to achieve because all humans are subject to the emotions of
fear, greed, pride of opinion, and all other excitable states that
prevent rational judgement. All the information and market
knowledge available in the world will be useless without the ability to
put that knowledge into action by mastering our emotions.
Finding flow
Urges to follow
Should I buy? Should I sell? Many traders often focus their efforts on
identifying buy and sell signals. The research and analysis they do
are geared towards reaching the goal of getting that "bottom line"
directive to guide their actions. Any successful, experienced trader
will tell you that although properly identifying buy/sell signals is
important, it is not the key to being successful. Instead, the way you
manage each trade is what will determine your success. Traders who
take the bottom line approach tend to believe that the success of
their trading activity is dependent on following the right buy/sell
signals at the right time. Clearly, it is important that a trader be able
to understand the process of generating signals and to use the
methods involved. Realistically though, almost any trader can find a
way to generate signals (whether using technical methods already
out there, coming up with their own system, or using their trading
platform's automated signal generation tools).
Any successful, experienced trader will tell you that your trade does
not begin and end with a buy or sell. There is a trade management
process involved. For each trade you make, you are making a group
of decisions. The way you manage and time those decisions is what
will determine the success of your trade. Suppose two traders get
the same trading signal at the same time and act on it. One's trade
may result in profits while the other's results in losses. This could
occur because each trader made a combination of additional
decisions throughout the process of the trade. These decisions
might include scaling in and/or out of the trade, using trailing stop
losses, setting profit objectives, waiting, etc. The trader who made
the more effective overall combination of decisions will have the
better trade results in the end.
Sam started trading almost three months ago. He has read that it is
important to set specific goals and try to reach them. He thinks, "I
have got to set my expectations high, otherwise I would not try hard
enough. I think I will try to shoot for a 20% profit per month. I have
got big dreams, and if I do not strive to reach them, I will never
achieve them." Big dreams can be a powerful motivator, but there is
a huge difference between lofty unrealistic dreams and specific
ambitious goals that one strives to achieve with a methodical and
detailed plan.
When novices set high goals that exceed their skills, they usually fail,
feel discouraged, and give up. So if you are a novice trader, like Sam
in our example, it may not be a good idea to immediately strive for a
20% profit per month, at least not yet. It is useful to distinguish
performance goals from learning goals. When we set goals, we
usually think of setting performance goals; that is, we think about a
specific percentage a month we should achieve. But for novice
traders, it is more useful to consider setting learning goals rather
than performance goals. A learning goal is more modest and can be
achieved more easily. It involves breaking down the larger goal into
specific steps that are doable, and rewarding oneself after each step
is accomplished. For example, a learning goal may be stating, "I am
going to study for 30-hours a week to learn a new trading
technique." The specific goal will not immediately lead to the larger
goal of making a 20% profit per month, but it is easy to achieve, will
lead to personal satisfaction upon completion, and in the long run,
will contribute to the long term goal of becoming a seasoned trader.
So if you are a novice trader, set yourself up to win. Do not set overly
high performance goals; set high and realistic learning goals. Break
the bigger goal down into specific steps, and reward yourself after
you complete each one. When you become a seasoned trader with
advanced skills, you can set out to achieve those high performance
goals. But right now, it is in your best interest to focus on skill
building, rather than high performance.
Successful traders follow their passion. One often hears traders say,
"I love trading so much that I would do it for free if I could." Indeed,
when one looks into the backgrounds of top traders, the story seems
to be the same. They all tried to get a job in the trading industry as
soon as possible, any job as long as it involved trading in some way.
They were fascinated by the markets and the challenges it offered;
the money was either secondary or not an issue at all. However, ask
a typical non-trader what he or she thinks of traders, and the
impression is quite different. Many think that traders are out to make
big bucks, achieve high status, and show it all off with luxury cars
and nice homes. These may be the side benefits of trading, but they
are not the primary motivators. Successful traders love the
challenges the markets offer and view their work as meaningful. In
other words, they take a healthy approach to trading success.
John has had five losing trades in a row for a total loss of 25% of his
trading account balance. He could feel defeated, pout, or get angry,
but instead, he is excited about his future prospects. That is because
he has decided to turn his loss into a gain. Professional athletes and
seasoned traders know how to turn losses into gains. Rather than
mull over past defeats, or trading losses, they use the setback as a
motivator, an opportunity to hone their skills, grow, and improve.
They examine what they did wrong, learn from their mistakes, and
view the temporary setback as a launch pad from which to achieve
higher future performance. Many successful athletes note that the
baseball player, Babe Ruth, struck out over 1000 times on his way to
setting the homerun record. Seasoned traders similarly note that
winning traders, with proper risk management, can win as few as
four trades out of a dozen and still come out ahead. In both cases,
these winners could have been bogged down with self-doubt, regret,
and defeat. But instead, they decided to use the "loss" as a
motivator for change and improvement. They examined their past
"losing" performance in scrupulous detail, discovered the factors
that led to poor performance, corrected these factors, performed
the task again, and honed their skills further until they eventually
achieved lasting success.
So try changing your viewpoint when it comes to losses. You will see
your mood and mind-set change dramatically. It may not be pleasant
to face failure and accept your limitations, but looking at these
failures in a broader perspective can change your mood from
hopeless depression to excitement and optimism. It is merely a
matter of thinking of trading losses in terms of the broader
perspective. You are human, and not perfect. You should expect to
fail on a single trade more than succeed. But the key is to keep the
bigger picture at the forefront. You will be a successful trader in the
long run if you just keep honing your skills. In other words, you may
strike out many times, but it is the shear number of wins that actually
matters. The more times at bat, the more you will strike out, but
overall, if you can learn from your past failures, your performance
record will be impressive. By monitoring the factors associated with
poor performance, and changing these factors in future trades, you
can turn a loss into a gain, and be on your way to becoming a
winning trader.
Enhancing performance through social support
One of the best ways to build a social support network for your
trading is to form a set of relationships with others who share your
trading interests. Ideally, this should include senior members of the
trading profession, or informal mentors, as well as traders at your
own level of skill, especially if you are a novice. These individuals will
have similar stressors and can help you cope more easily. They also
need to form relationships with other traders who, like you, know the
pitfalls of the trading field and support your motive to become a
seasoned and consistently profitable trader. Social support is a
proven method for neutralising stress, and the unpleasant emotions
associated with it. It is an essential key to trading success, so go out
and add a few traders to your social support network; you will find
the journey to success a lot smoother.
Working effectively
John tells his friend, "I am fully committed to trading. I read The
Business Day, The Business Report, every morning and the Financial
Mail every week, and I sift through at least 100 technical charts at
night, in the morning, and every break during the day." It sounds as if
John is motivated, but is he working effectively or merely keeping
busy? As writer Ellen Glasgow notes, "All change is not growth, as all
movement is not forward." John intends to build his skills as a trader,
but he may not be doing so in an efficient manner; he may actually
be standing still despite his time and effort. You do not need to
spend hours and hours reading about the markets if it does not
directly lead to a profit. For example, most media coverage of the
markets is for entertainment value, so spending hours reading or
viewing it is a waste of valuable time. You need to work efficiently
and make sure that the time you spend learning about trading and
the markets does indeed pay off.
The point is that if you are a novice trader, you cannot work under
the belief that everything you do will have a payoff. You must also
consider that there are a fixed number of hours in the day that you
can work, so you must spend that time efficiently. In John's case, he
is likely to be using his precious limited time and energy reading
about the markets and world events that have no direct bearing on
the intra-day or intra-week prices of the shares that he wants to
trade. Similarly, sifting through share charts that have no bearing on
the shares one trades is also time misspent. You cannot be
overloaded by information. You need to maintain focus and
efficiency. Trade a few key shares, and know everything you can
know about those key shares. Become an amateur specialist.
Memorise the chart patterns, how the prices change during the day,
and the factors that coincide with the price changes. Knowing about
shares you do not plan to trade or about broader economic events
that do not influence your key shares will take time that, realistically,
you just do not have. Trading is a challenging profession, and you
need to focus your psychological energy on what matters most. Do
not be distracted by learning additional trading strategies that you
will never use, or new indicators that are redundant with basic
indicators of trend. And do not believe you must keep up with all the
media hype. Focus, work efficiently, and in time you will build the
skills you need to become a consistently profitable trader.
If you have not seen the movie "Wizard of Oz," you are in for a treat.
It is a great movie on multiple levels. The climax occurs when the
heroine, Dorothy Gale, reveals that the great wizard is only a
common man pretending to be something much more than he really
is. Does this remind you of any recent newsmakers and shakers? At
the moment, the list of pretenders is long. The risk of deceit goes
beyond mere mortals. As a trader, you must question virtually
everything, even what appears at first blush to be hard, cold facts. It
can even be doubted whether there are such things as "facts,"
unfettered by personal interpretations or prejudices. All information
is analysed and interpreted. Interpretation gives information its
predictive power, which, in turn, usually results in action. Action for
us means trading, and trading brings us winners and losers.
Traders cannot be so nave. The facts you deal with are the basis for
your trades. If you blindly accept the facts that flow into your
consciousness as truth, you will never become a successful trader or
investor. As a wise old man once said: "Liars figure and figures lie."
Meaning facts can be manipulated by just about everyone who
touches them, particularly politicians, financial analysts and just
about anyone trying to sell you something. And psychologically, even
you can unconsciously manipulate so called facts. Consider
something that is supposed to be completely straightforward, such
as technical analysis; even it can be prone to subjective
interpretations. Have you ever heard a gaggle of Elliot wave analysts
argue about what wave a particular share or commodity is trading in?
"This is the third wave!" "No, that is still part of the second!" Nothing
is black and red in trading other than the final results. That is why
you see so many trading styles and theories. And why you cannot
simply mimic someone who is successful and be just as successful
yourself. Trading is not a team sport nor is there any single way to
become a superstar. You must forge your own way to the winner's
circle. Part of that is finding out, for yourself, what is behind the
curtain and how to analyse, interpret, and find the facts that are
pertinent to your trading modus operandi.
Johan is a novice trader who is down R20 000 for the day. He thinks,
"That is a lot of cash. I could pay my living expenses for the entire
month with that. I need to win it back right now." Johan has made a
fatal mistake: He has started to look at his profits and losses
personally, and now his emotions are playing a role in his decision-
making. He is now seeking "revenge" and such emotions have no
place in trading. It is useful to cultivate a more objective, unemotional
approach when examining profits and losses.
When there are many amateur participants, there are strong trends.
As prices rise, the media reports on the optimism. Next, the
confidence of the masses rises, and more and more enthusiastic
buyers enter the markets. In such markets, the uncertain investor
can wait for confirmation from positive news or the observation of a
sudden buying spree. This conformist strategy works sometimes,
but it is not a strategy that works consistently or very well today.
These days, you cannot assume that when you "buy low," there will
be an excess of nave amateur buyers ready to push the share price
up higher. If you wait too long, you will likely hit resistance, and it will
be too late to profit from the move. These days, there is less
certainty. You must gauge the phase that the market is in, anticipate
what will happen next, and enter and exit a trade at optimal times.
These conditions require a trader to depend on one's instincts, and
rely on one's perceptions and opinions. Many times one must take a
contrary position.
So following the crowd is not bad all the time, especially for those
who do not like risk. On the other hand, if you are a trader, you are
not looking for safe investments. You are looking for volatility,
necessary risk, and a good chance for making a big profit. Most of
the time that means going your own way. It requires that one think
like a contrarian, guessing what the crowd will do next, and
anticipating how the movement of the masses can benefit you as a
trader. The key is to know when to follow the crowd and when to go
against it. The crowd is usually right, until a turning point occurs.
When virtually everyone has taken the position that the market is
headed in a particular direction, there are few traders left to push the
trend further. At that point, a countertrend initiates and moves the
market in the opposite direction. The challenge is predicting when
that turning point will occur, anticipating it, and developing a trading
plan to capitalise on it. Now, this all sounds easy in theory, but in
practice, it is difficult to implement a trading strategy to capitalise on
this cycle. How can one predict the turning point? Some say it is
almost impossible. All you can do is develop a sound method that
works most of the time but also admit that it may fail. Whether you
use technical indicators or you are lucky enough to use the media
news to your advantage, you must temporarily believe in your
method, put money on the line, and work under the assumption that
overall, luck will be in your favour should you make enough trades.
(And by all means, control your risk; otherwise you will be the victim
of relatively risky trades, rather than the victor.)
Setting goals
With every New Year, it is time to make plans for the future, and set
exciting new goals. Goals can be motivating. When we think of where
we want to go next in our lives, and when we formulate specific
goals, the goals suddenly seem possible. We start thinking of various
possibilities. The more we think, the more plans we make, and the
more the possibilities seem realistic. We suddenly feel energized and
ready to take on the world. But it is important to not get too carried
away. Whether you are making plans for your personal life or setting
new trading goals, you must set goals carefully. It is vital that you set
realistic goals, goals that are challenging enough to take you to new
heights, yet humble enough to match your actual available
resources.
At the start of a New Year, it is tempting to be extremely optimistic.
Why not shoot for the stars? Although high aspirations are necessary
for one to achieve ambitious goals, "shooting for the stars" usually
leads to unrealistic goals, and that usually leads to failure. For
example, about 90% of the people who set New Year's resolutions
fail. Most of these failures occur because people were too optimistic
when setting their goals. They started to think, "anything is possible"
if one "dares to dream." As inspiring as the "anything is possible"
attitude is, it rarely proves true. You cannot merely think your way
into success. It takes hard work and planning. And all the hoping in
the world can't make one achieve the impossible. You must have the
proper resources.
As any seasoned trader will tell you, the key to long-term profitability
is a flair for devising innovative, new trading ideas. Winning
strategies are hard to find. And after one goes through all the trouble
of developing a lucrative trading strategy, it suddenly stops working.
To stay ahead of the pack, it is necessary to find new strategies and
opportunities; otherwise, you will see a noticeable decline in your
overall profits. Here is a basic three-stage framework for generating
and critiquing new ideas:
Brainstorming,
Planning, and
Playing devil's advocate.
In the brainstorming stage the goal is to create as many new ideas
for trading strategies as possible. Be open and allow yourself to think
freely. Do not hold back. Let the motto, "There is no such thing as a
stupid idea," guide you. Think about what you would want to do if
anything were possible. You may come up with some unrealistic
ideas, but at this stage, the goal is to generate as many ideas as you
can. You do not want to limit yourself. If you inhibit your creative
juices, you may block an innovative idea from entering your
consciousness. In the planning stage the goal is to refine your
potentially innovative idea. It is time to move your idea from a vague
impression to a concrete and practical plan. Try to work out every
detail and think about how you will implement the plan. Think
creatively, but think like a realist. What can you realistically do to
implement your idea? What signs and signals suggest that market
conditions are just right to implement your idea? What is a realistic
profit objective for your idea? How will you limit your risk? What is
your exit strategy? The more detailed the plan, the more easily it will
be to follow. You will be able to evaluate its potential profitability
more easily as well.
The final stage requires you to play devil's advocate. Now that you
have outlined a reasonable plan, it is time to consider what is wrong
with it. This is a key stage. It has been said that brilliant trendsetters
are those who can distinguish a truly creative idea from a pipedream.
It is vital to be a harsh critic. In this stage, it is useful to assume that
most trading ideas are "bad ideas" and that you must entertain every
possible problem with your plan. Even the most logically consistent
idea may fail under actual market conditions. What basis do you have
for believing that your strategy will work? What assumptions did you
make when devising your plan? Are they reasonable? What is the
worst-case scenario? A sceptical approach can prevent losses, so it
is essential to find every possible flaw, and either fix the plan, or
ditch it. By following this three-stage method of brainstorming,
planning, and critiquing, you can devise innovative trading strategies
that will keep you profitable under continually changing market
conditions.
Not everyone has the same abilities. It does not make sense for an
amateur golfer to think that he or she can play like Tiger Woods. And
it is not realistic to think that an average trader can approach the
success of a "Market Wizard." But whatever your skill level is, you
should try to maximise it. For some, that may just mean putting on a
few small trades a day to develop an intuitive feel for the markets.
For others, it may mean making R10 000 a day. The main point is to
maximise your performance. Try to achieve a level of performance
that exemplifies the best that you can be.
Use the Success History Search before you start the trading day or
when you are about to execute a trade. If you find that replaying just
one winning accomplishment is not enough, replay two or three until
you cultivate a winning attitude. Images are powerful. By
remembering vivid images of past successes, you will feel optimistic
and ready to master the markets.
So when you feel that your earnings have reached a plateau, do not
get discouraged. As long as you are making profits, and staying in
the game, you are continuing to develop your trading skills. You are
adding to your knowledge base. You are developing a more intuitive
feel for how the markets operate. It may not seem like you are
making the profits of a "Market Wizard," but if you keep at it, you will
be one of the rare few that join the ranks of winning traders.
Have you ever had those days, or weeks, where you just could not
get on a winning streak? Perhaps you are a novice trader trying to
break into the field, and wondering if you will ever become a full-
time, active trader. Sometimes, it feels like you are just spinning your
wheels. It is easy to feel like throwing in the towel. Whether you are
feeling down and beaten or in a little bit of a slump, positive imagery
can restore your optimism.
You can use a variety of positive images as a source of inspiration,
and depending on your background and resources, some positive,
motivating images are more realistic than others. If you are from a
well-to-do and well-connected background, it may be motivating
and realistic to imagine yourself becoming the next Warren Buffet.
But if you're like most people, you would settle for becoming a
skilled, profitable trader. Think of how great it would be. Imagine
yourself having a wealth of market experience and being able to
recognise a chart pattern intuitively and being able to react just as
instantly. Every week, you have no problem identifying profitable
trade setups and you have enough money in your trading account to
take advantage of them in a major way. And then there are times
when you hit upon a good run, and really make huge profits. Life is
good. You enjoy the process of trading, and do not need to care
about meeting your financial goals anymore. You just know you are
having fun all day and sleep soundly at night.
Is that image not pleasing? Does it not motivate you to work harder
to reach your goals? Anyone can dream, but what is the difference
between a realistic dream and a pipedream? That is a hard question
to answer. Only you know your abilities and what is realistic based on
your background. It does not make sense to imagine the impossible,
however. It may feel euphoric in the short term, but you will know
that your motivating image is just a fantasy. If your dream is
unrealistic, you will end up frustrated. You will set yourself up for
failure because you can never attain the goals you have set. It is
important to have a positive image that is motivating but also
realistic.
Trading can be fast paced. As an active trader, you must sift through
a barrage of information, from media reports to trading statements
to unexpected national events. It is hard sometimes to make sense of
it all, and to see which pieces of information actually impact the
shares that you are trading in significant ways. What will happen next
is never certain. Trading plans that you developed during off hours
may not match current market action. When things do not click, and
fall into place in the way that you had planned, it can be stressful,
confusing, and frustrating, but in all the confusion, it is vital that you
keep cool and organised. Rather than try to do too much with the
little time and energy you have, it is vital that you stay focused.
One of the most effective ways to cope with the pressure to get
more things done than you have time for is to change your time
perception. Time perception is the degree to which people perceive
their use of time as structured and as contributing to a specific goal
or set of goals. When you are frustrated and unsure of what to do
next, you can feel that you are moving aimlessly back and forth
among alternatives and getting nowhere. It is as if you are out of
control. At these times, it is necessary to return structure into your
trading life. When you perceive that your time is structured and that
you are working toward a specific purpose, you will feel calm and
satisfied.
How good of a trader are you? Everyone eventually must ask and
answer this question. The answer may be unpleasant, but you have
to face your limitations eventually. Some traders feed their trading
accounts every month with additional funds to avoid looking at how
poorly they are doing. It is natural to take such measures. We all
want to be successful, and it can be devastating to discover that
despite our best efforts, we just are not trading up to par. Sure, it
takes time to hone your trading skills, but if you are losing money
every month, you must be doing something wrong. Why not do
something right and take home huge profits?
Why do some traders have low win-loss ratios? One of the reasons is
that they do not look at the potential risk before they make a trade.
They take trade setups that are overly risky and unlikely to produce a
profit. Rather than take the trade, they would be better off waiting for
a better trading opportunity, a trade setup that potentially could
provide large profits and little risk. It is not easy. It takes patience,
and a strong commitment to study the markets and identify good
trade setups. But, in the end, it is worth it. If you carefully select high
probability trade setups, you will trade more profitably and you will
be more satisfied with your performance. A high probability trade
setup corresponds to a price level where you perceive a clear
advantage in that you are more likely to win than to lose if you enter
into the market around this price level. Suddenly, you will find that
you will get on a roll and your profits will increase greatly over time.
By carefully monitoring your performance and managing your risk,
you will see your profits reach new highs.
99% of a victory
Make The Right Choices: Many times there is only a subtle, small
difference between having a winner or a loser, for example, a
moment's doubt may be enough to force you to exit, only to see the
trade work out right afterwards. That is why it is important that you
try to make every decision as though it were the most important of
your life. Part of that requires sticking closely to your plans. If you
make the right choices as often as you can, you will collect far more
winners than you otherwise would.
Be Consistent: There are so many forces in the markets, acting in so
many different directions, that varying your own approach and
response to conditions only adds to the chaos. The best traders tend
to be very consistent in what positions they put on, when they put
them on, and when they take them off again.
Sharpen Your Focus: The markets offer exceedingly diverse
environments in which to make money. You cannot possibly master
them all. That is why successful traders specialise very narrowly.
This allows them to build their expertise and narrow their attention,
to give themselves an edge, albeit in a very small area. This edge
generally translates into profits.
Jason has been holding a position in a particular share for the past
month. It has been doing well so far, and earnings forecasts suggest
profits, in part due to sales in new markets. On the other hand,
economic figures seem grim. The business news is full of stories of
company cutbacks, which can easily suggest lower sales for the
company's widgets. Jason is stuck in a quandary. He is proud of his
decision to buy the share, and he is hoping to make a profitable
trade, but he wonders, "Am I trading on the news? Am I listening to
the media and ignoring other more important economic indicators?
Should I sell now or hold it a little longer?" He wants to make a profit,
but on the other hand, he does not want his winning position to turn
into a loser. It is one thing to make a wrong guess upon opening a
position, it is quite another to let a winning trade turn into a loser.
Inaction is a major cause of regret. Rather than face that possible
regret, why not just sell now, lock in the profits and feel pride? The
interplay between regret and pride influences many investment
decisions. On the one hand, people prefer to experience pride, and
bask in the glory of a winning trade, but on the other hand, "they
need to let their winning trades run." Letting a winning trade run is
hard to do. It is possible that it will turn around, and the inaction of
holding the position may cause regret later.
People always have some opinion about where the markets are and
where they are going. Most of these people are considered part of
the masses or crowd. They believe that they have sound reasoning
for what the market, or a particular share, will do in the future.
Experienced traders know that such analysis is, for the most part,
irrelevant. What separates professional traders from novice traders is
not how well they analyse trade opportunities, but how much profit
they make. When people think about trade "analysis", they are
thinking about predicting or determining future price movement.
Practically, we all know that none of us have the gift of predicting the
future...No matter what kind of analysis we do and how well we
determine the probability of what will happen, there is always the
chance that what we think will happen would not happen. So if there
is really nothing we can do to determine what will happen, we cannot
use that as a valid way of evaluating a trader's performance.
If you are new to the markets or have not been very successful, it is
useful to try this simple trading approach. Look at indicators of
momentum and try to determine whether the market is bearish or
bullish. If it is bullish, find a share that seems to follow the general
trend. Buy a few shares, hold on to the position for a few points, and
then close out the position. See if you can make a quick profit. This
strategy may seem simple and a little nave, but sometimes such
strategies have merit. Again, think of the surfer. When one is trying
to ride a wave, he or she is not concerned with why the wave occurs.
He or she does not worry about when the next wave will come.
Surfers simply try to find a wave, or an opportunity, get on it, and
ride it. They do not mull over issues, such as laws of motion
according to classic physics or how gravity and the rotation of the
planet influence the occurrence, height, or force of a wave. Such
thinking is distracting. One does not need to understand why the
wave comes in order to ride it. Some successful traders take a
similar approach. At any given moment, one does not need to know
why the share price seems to be building momentum, but merely
that it is building momentum. Traders get in, buy a few shares, and
see if they can ride the trend to make a profit.
But just as the surfer is not interested in being slammed into the
sand, seasoned traders take precautions. They do not enter a trade
without a well-defined plan. They have an idea of when they will buy,
what technical indicators show that the price is in motion, and how
they will exit once the trade is executed. They set a stop loss order
or develop an exit point. They decide beforehand that they will get
out of the trade if it goes against them. They do not wait until the last
minute before taking action. And they do not risk it all on one trade.
They manage their risk by limiting the amount of capital on any one
trade to a small amount of their total trading capital. Similarly, a
surfer would not want to surf only one wave, destroy his or her
board, or hurt oneself and not be able to surf again. The fun comes
from surfing wave after wave. Similarly, a successful trader enjoys
executing trade after trade and "riding" each "wave" or trading
opportunity that presents itself. It is useful to consider the surfing
analogy when trading. Sometimes, there is a natural human
tendency to make things more complicated than they need to be,
and it is useful to simplify things once in a while.
Reality checks
Almost every trader has experienced the adrenaline pumping effects
of a fast paced market. Many know it so well that they understand
what it means to succumb to the rush, and they recognise how it can
lead to making hurried and poor trading decisions in spite of all their
trading knowledge. As a committed trader who is always watching
the markets, reading the news, and setting goals for yourself, you are
likely to experience what might be called "mental isolation". This
occurs when you are so involved in the micro-view of things that you
mistake unjustifiable and hasty conclusions about the market as
confident decisions in tune with your mental edge. And it is usually
after you are faced with the results of your decisions that you realise
you gave in to the rush.
Successful traders realise that the risk of swaying from their trading
plan due to mental isolation is always there. The risk is associated
with being in an environment where there is a barrage of information
(bids, offers, prints, headlines, analyst commentaries, etc.) that is
coming at you in a short amount of time and that you have to
process. Clearly, you cannot ignore any of this information, because
it is what you will ultimately use to plan and time trades, determine
signal generations, and execute orders. Instead, the key is to create
a trading environment that assists you in avoiding mental isolation.
That way, you still have the information you need at the same pace,
but you do not run the risk of getting caught up in the rush.
There are a variety of ways you can create this type of "reality
check" environment, according to what suits your trading
personality. Some have found that taking short breaks away from the
influx of information is helpful, although practically difficult to do.
Most traders, especially those who are very experienced, prefer
communicating with others while reading and watching the
information. Although many have tried using online message or
bulletin boards to this end, there is no replacement for real human
interaction.
Many traders like to sit out the first hour, cautiously waiting for the
dust to settle. It is true that things can get a bit crazy early in the
trading session and that it is often wise to avoid the stresses and
pitfalls that often attend such craziness. But it is also worth
considering that some of the best trades of the day tend to occur
shortly after the opening, when relatively few traders are confident
about where to enter or exit amidst the flux and confusion. It is their
nervousness and uncertainty that creates opportunities for those of
us who can make sense of it all.
Selectively influenced
How many news headlines did you read this morning? How many
research reports did you read or market commentary did you listen
to? Too many? Traders often struggle with information overload. This
can be detrimental to their focused pattern of decision making or
trade system application. There is a huge amount of information out
there, and if you have been trading for a while, you would have
probably experienced being able to draw two different conclusions
about the same trade instrument on the same day, depending on
which research report you have read. And that can be frustrating,
especially if you plan on trading that particular share on that day. So
how do you deal with it? You do what successful traders do: be
selective about your resources and the information that you pay
attention to.
Analysis paralysis
John has been looking at a profitable trade setup all day. He has
tediously studied technical indicator after technical indicator, even
though many are redundant and converge. He continues his search,
nevertheless. He irrationally believes he has missed something, but
he is not sure what it is. He is reluctant to put his money on the line
until he is absolutely sure that his trading plan is fool proof. He
thinks, "I have got to account for every possible factor that may go
against my trade, or else, I will lose money, and that would be fatal
blow." John is afflicted with analysis-paralysis. He cannot make a
decision that needs to be made immediately, and he hesitates out of
fear and uncertainty. People differ regarding the extent to which they
are afflicted with analysis-paralysis. For some people it is relatively
benign and may even work as a very adaptive approach to decision-
making, but for others, "analysis paralysis" is a deep-seated
psychological problem.
It is true. Short-term trading must rank near the top of the list of the
most unpredictable and exciting occupations on our planet. As the
aggregate of market players ride the market to soaring heights and
terrifying lows, the collective consciousness of the crowd soars to
euphoria and falls in despair in concert with the movement. If the
crowd experiences a cumulative emotion ranging from mild
optimism, greed and euphoria, to minor anxiety, then fear and
outright panic. It stands to reason that all but the most robotic of
traders go through personal feelings that mirror the experience of
the crowd.
It is common to find traders who stay in high spirits when the market
trends up and feel dejected and depressed when the market falls. In
past years, this may have had more significance because many
traders refused to sell short and they missed out on market action
when it tumbled. Another reason for the "up is good, down is bad"
emotional seesaw lies in the unfortunate fact that when markets fall,
many novice traders ignore their stop-loss strategy. A falling market
equals a falling trading account value. The downside to this
syndrome, however, is more than detrimental to your wealth.
Attaching your emotions to market gyrations can adversely influence
your relationship with your loved ones and friends.
Our past experience often colours the way we see things. We touch
a hot stovetop and we experience pain, and we decide never to do
that again. Or, when we hug a loved one and receive a hug back, we
learn that hugging that person produces pleasure . . . so we try to do
it again, and soon! Our experience with the markets similarly colours
our perceptions, and it may sway the way we approach the markets.
No matter what colour you paint your picture of the market, positive
or negative, either way, it will have a powerful influence on your
actions! So it is vital that you are acutely aware of just what your
perception is and what past experiences coloured your perception.
This may be a good time to honestly assess your vision of-and
feelings toward the market and your role in it. It will surely be time
well spent.
What will this goal look like? Perhaps you will state it as something
like this: "My goal is to become a fulltime trader by this date next
year. I will work toward capital growth of at least 20% a year. In doing
so, I will not take more than a R6 000 aggregate drawdown during
any five-day period, nor will I risk more than 1% -2% of my trading
account on any trade. (If your trading account equity is R300 000,
then 2% is R6000. Accordingly, you adjust the share size and
protective stop loss so that you never lose more than R6 000 on any
trade.) 10% of my monthly gains will be moved to an alternative, low-
risk investment strategy that will apply toward my retirement."
Now, map out your plan. What is your budget for equipment,
software, and education? How much time can you devote? How
much money will you use (assuming it is money that you can afford
to lose!)? What trading time frame, or style, matches your
personality? (For example, if you cannot make split-second
decisions, then intra-day trading, for example, is not for you. Perhaps
swing trading, with a 2-5 day hold, better suits your personality.)
Maybe you want to target certain shares in certain indices and
become a "specialist" in those shares. Or maybe you prefer to trade
ETFs (Exchange Traded Fund) such as the Satrix 40.
Why can you not just "dabble" in this arena? Why can you not just
saunter into the trading day at will, scan a few charts, and throw a
trade in if you feel like it? Because, when you trade half-heartedly,
you are telling yourself, your trading account, and the world, that
whatever the outcome, it does not matter. (If you have money to
burn, and lackadaisical trading provides your entertainment, by all
means ignore this article and enjoy yourself.) Further, in many
occupations or undertakings, a slapdash attitude will mean simply
that you do not excel. In most situations, you can shrug that off. In
your trading career, though, this mind-set almost assuredly will
devastate your trading account and take your self-esteem with it. If
you decide that trading is your part- or fulltime occupation, commit.
Steve has just made a losing trade. Although he is only down 2%, he
cannot stop thinking about it: "What did I do wrong? How could I
have prevented this loss? What am I missing here? What does this
loss mean for me as a trader? What is going to happen next? Can I
handle it?" Steve is a ruminator. He cannot just let it go. He
persistently mulls over the loss, playing it over and over again in his
head. Ruminating about a past loss not only intensifies a bad mood,
but a recent study by Dr. Andrew Ward and colleagues demonstrates
that ruminators are less satisfied, less confident and less committed
to planned courses of action, compared to non-ruminators.
The entrepreneur, the corporate CEO, and the top-notch trader are
all viewed as exemplars of independent thinkers. They go their own
way, go against the status quo, and are unyielding individualists.
Wellthat is the perception. This issue of conformity versus
independence is addressed several times, in weekly assessments,
daily columns, and trade doctor questions. This issue always seems
to spark controversy. Folks do not like it when it is implied that they
are not completely independent, and even slightly conforming.
Ironically, some have even argued that they are indeed independent,
which seems contradictory, since truly independent people could
care less what people think of them. There is nothing wrong with
being a little bit of a conformist, rather than a firm individualist.
Psychologists have conducted comprehensive research studies of
business leaders, and guess what? They are conformists. They have
to be. A skilled conformist has an astute sensitivity to social cues,
can read social situations accurately, and can easily modify his or her
behaviour to react to the situation in a manner that puts him or her at
an advantage. So there is nothing wrong with being a little bit of a
conformist, so if you have been a successful businessperson or
other professional, you are probably a conformist relative to the
entire continuum of conformity versus independence.
It is the conformist in you that has made you successful and gotten
you ahead, so extol yourself for being an effective and adaptive
conformist. Perhaps some people strongly dislike being called
conformists because they think that "conformity" means
"thoughtless adherence to social norms." That is ultra-extreme
conformity, overly dependent and probably not very adaptive.
Healthy conformity entails social sensitivity, and adaptive rule
following. Extreme individualists, in contrast, tend to be loners who
do not care about social rules. The unkempt eccentric artist comes
to mind as one exemplar of the extreme individualist. They truly go
their own way, and do not care if they have no status, money, power,
or friends for that matter. Although this exemplifies the kind of
individualism that is conducive to trading, you can see that most
successful business people do not fit into this category, and are
more towards the conforming end of the continuum.
You have been told time and again that a strong commitment is vital
to long term trading success. We have all seen the adverse
consequences of people who are not committed to their goals, in
other fields as well as trading. When one is not committed, he or she
waxes and wanes, procrastinates, gives up easily, and never seems
to achieve one's goals. Accomplishing significant life goals requires
strong commitment, whether it is graduating from university, starting
a business, or getting a significant promotion. But trading seems a
little different; many people have a difficult time making a strong
commitment. There are several good reasons why. It is useful to gain
awareness and come to terms with them.
Trading is different from many professions in that the effort one puts
in is not directly related to a clear and immediate payoff. With most
professions, it is a certainty that the number of hours you spend
learning a craft, and applying it, has a direct payoff. For example, if
one were a stone mason building a wall, he or she knows with
certainty that placing brick upon brick, hour after hour, will lead to
completion of the wall (The wall may look unattractive if the mason is
poorly skilled, but the wall will get finished, nevertheless). There is a
direct one-to-one correspondence between effort and final
outcome. When it comes to trading, in contrast, traders can put in
hours of effort, but success can elude them. With trading, a
threshold of skill must be achieved before rewards, or profits, are
consistent. (This may be true of other professions, but whether one
has the talent to learn the skills is immediately apparent to teachers
and gatekeepers, and one is prevented from even trying to master
the profession.) Unless one achieves a high level of trading
proficiency, one may never cent trading. The possibility that one's
time and effort may not pay off immediately, or at all, makes a strong
commitment to trading difficult to nurture. It is reasonable to
question whether one will become a successful trader. A Pollyanna
"can do" attitude is not going to alleviate these doubts, if deep down
you know that the doubts have some truth to them.
How can one cope with this issue? There are several ways: Accept
the possibility that it may take you some time to build the skills you
need to become a profitable trader. Do not think that you MUST be
profitable immediately.
Follow the old adage, "Practice makes perfect." Give yourself time to
build the trading skills that you need. Just as with any activity that
requires skill building, such as playing music or sports, it is vital that
you practice, enjoy the process of learning, and patiently wait to
build up the necessary skills.
Put your goals in perspective. You may need to initially set modest
goals, such as learning how to "paper" trade, or successfully trade
small positions, before deciding to trade full time to make your entire
income. Perhaps you will make it as a professional trader, perhaps
you will have to settle for being a proficient amateur, but if trading is
your passion, and you enjoy it, the idea that you need to spend time
developing these skills should not deter you. Becoming a trader who
is consistently profitable is rare, and this fact hinders one from
making a firm commitment. Many professional traders warn novices
that trying to gain success overnight is daunting, unrealistic, and
quite discouraging. It is best to take it one step at a time. Gain
knowledge, develop skills, and then gradually increase your trading
position size. Even seasoned traders point out that trading is so
difficult in the long term that they just take it "one day at a time or
one trade at a time". It is easier to develop commitment by first
committing to smaller goals before striving for larger goals. Following
this wisdom will help you strengthen your long-term commitment to
trading.
However, if you "choke" on some trades because you have not yet
developed a high level of trading skill, it does not matter that you
have a strategy that puts the odds in your favour. It is similar to
professional sports. There are strategic plays that are executed
during the game, but an athlete must have honed a set of advanced
skills to execute the play flawlessly. Otherwise, it does not matter
how ingenious the play, it will fail without capable players. When the
professional athlete sees the ball coming, he or she must take action
in an instant. The first or second centre on the rugby team needs to
get into the right position, catch the pass, and make it to the try line.
He does not have time to let his poor catching ability prevent him
from spoiling the game plan. The wicketkeeper is better off during a
cricket game if he can automatically and almost instinctively catch
the ball without having to over-think it. When one does not have a
high level of skill, an inspired plan is doomed. And it is the same with
trading. It does not matter how favourable the trading strategy is if
one does not have the skill to execute it flawlessly.
Both traders and athletes must act on a moment's notice. They must
work intuitively to observe and interpret signals quickly, yet
accurately. They need to work intuitively to see signals so quickly
that it is almost unconscious. Building such skills takes practice. One
needs to make trade after trade, so as to perceive subtle changes in
market conditions that are hard to read. Across time, one also learns
how to set protective stop loss strategies to manage risk, without
getting "stopped out" due to extreme and sporadic volatility. And,
eventually, one learns to gauge when it is time to close out the
position for a profit, or cut one's losses to protect capital. The
markets are continually changing, and only with practice can one
learn to execute trades freely, and intuitively react to subtle market
conditions. So do not underestimate the importance of practice.
Sure, a winning trading strategy is necessary, but you must also have
a high level of skill to take advantage of those winning odds. Skill
building can help you take advantage of those odds and generate
consistent profits.
The financial markets are in constant flux, and in the past few years,
we have seen many changes. The reasons are numerous; the
availability of online investing, new government regulations, and
technological advances are merely a few. Despite these changes, the
markets are still free, guided by the good old invisible hand that
drives supply and demand. But perhaps one of the most significant
influences is the increased number of participants who have entered
the markets. With more people trading and investing, the markets
are more orderly, especially when it comes to identifying support and
resistance levels. Support and resistance are key levels that estimate
the probable duration of a trend. They are useful tools for trading
effectively.
The bull market of the 1990s drove average daily volume to record
levels as professionals and amateurs alike took part in a market that
went virtually straight up. Years later, after the bubble burst and
prices began to recover, trading volume, though lighter than year
2000 levels, is still much stronger than it was. This increased
participation is reflected in huge average daily volume, which in turn
has made support and resistance more solid and easy to spot.
Pullbacks in the recent uptrend, for example, turn higher at the
bases of support, as expected, but the quality of these bases is
second to none. The bases of support and resistance are solid and
clear, all because of the increased number of participants. And now
that prices have turned higher, we have plenty of levels of resistance
both above and below current prices in the equity and futures
markets. This will continue until the markets make new record highs.
Traders often wonder why prices rose so high and so fast during the
raging bull market. The answer is simple. There was relatively little
resistance. There were no areas of sellers above, as there are today.
This is yet another factor that makes the current markets more
orderly, with more clearly defined areas of both support and
resistance.
And what would you guess is the biggest variable of all, which you
probably assume, is constant? As Pogo so aptly put it, "We have met
the enemy and he is us!" Your personal psychology is also constantly
in flux. You are happy one day and melancholy the next; you are
continuously learning new things about the market and forgetting
others; your confidence level twists and turns like the river's path.
When you left the house for your trading desk, did anything go
wrong or especially right? What about the trip? How did your first
trade go off? Did you have clarity the minute you began trading or
did you struggle for it? Everything is moving, whether we see it or
can measure it. This insight is particularly important to system's
developers or traders using black box software. It helps explain why
certain trading software programs work well for only a short time
before they crash and burn. There are many other reasons for this
phenomena but the ever-changing interplay among market forces is
certainly a big part of it.
How can you deal with constant change? First, always be aware of it.
Expect it. Accept it as normal. Second, protect your profits from the
ravages of the unexpected. Risk management, such as protective
stop losses, is vital. Constant vigilance can make a big difference;
healthy scepticism can be a lifesaver. Third, become a full-time
student of the particular market you trade. Develop a passion for
trading and your primary trading entity. Work at becoming a Zen-
trader, where you become one with the market and feel its moves as
you would if you were swimming in the river. None of these
approaches are easy, but neither is becoming a successful trader.
Do not look at anyone else's record but your own. You will often be
tempted to compare your current performance to that of others.
That is how it has been throughout your life, and it is not easy to
change a lifelong pattern overnight. But with trading, you must
restrain this urge. Everyone has a different learning curve. To keep
your spirits up, you will do best as a trader to focus on improving
your past performance record, rather than looking at those of other
traders. You do not know what factors created their performance
records, so comparisons can only mislead and hinder you. Other
people's records do not have a direct bearing on your own record. By
searching for factors that are going wrong with your method,
however, you can identify the personal factors that have been
specifically holding you back, those that are unique to you.
John and Sean, two part-time online investors, are discussing the
performance of their share portfolios at lunch. John inquires, "How
well did you do last year?" Sean with assurance declares, "I made a
return of 20%." John replies sceptically, "That is a little hard to
believe. Are you sure?" Sam says, "I can prove it. I have got the
records on my laptop." To Sean's dismay, a close examination reveals
that he has overestimated his performance. He actually made only
15%. His estimate was off by about 5%, which is typical when
investors are asked to recall their performance record from memory.
It is hard to defeat strong ego defences. We all want to believe that
we are top performers, and unless our record is right in front of us, it
is easy to let our ego bias and distort our recollections, all in an effort
to bolster our self-worth. When asked to estimate how well we will
do on a task, we tend to optimistically think that we will do better
than we actually do. And when asked to recall how well we have
done in the past, we tend to remember only the good trades, while
forgetting the bad.
If only conditions were as ideal today. Today, the "waves" are much
shorter, and there are fewer nave amateurs ready to continue the
buying spree once it starts. These days, you need to think more
creatively and independently. In several interviews, the interview
candidates tell a familiar story, "I learned to trade in a bull market,
and I wrongly thought I knew how to trade." What they usually say
next is that market conditions changed and they quickly found that
they could not make a cent. When you look at those traders who
reported big wins before 2000, you tend to find that many have not
consistently made very much since. So that is one common idea
addressed: A trading approach may work impressively until the
markets change. When they change, one cannot simply follow the
crowd or let the "trend be your friend." It is not that easy. You have
got to evaluate the markets from multiple perspectives, rely on your
own instincts, and think independently.
In many ways trading shares and flying airplanes are very similar. As
with flying, you have choices when it comes to managing your
money. You can fly commercially and let a professional take you to
your destination or you can fly yourself and take personal control.
But just as with piloting your own plane, you would be wise to avoid
taking matters too lightly. It is crucial for your survival that you build
up the requisite skills and take proper precautions to protect yourself
from a graveyard spiral, in flying as well as trading.Pilots and traders
work with basic forces (such as support and resistance), and they
trust their instincts and intuition, while simultaneously looking toward
objective indicators to gauge significant parameters. When flying an
airplane you monitor the instrument panel to glean several pieces of
key information from the airspeed indicator, altimeter, and directional
gyro. This information is vital for keeping you on the right direction.
When managing your own money (electronically), the trading
platform (such as that on PSG Securities Ltd website) similarly
provides key information: price, volume, and momentum. These key
factors help you navigate and plot a course of action. On the other
hand, neither the pilot nor the trader should make things too
complex. It is vital to focus on the on-going process of trading,
anticipating potential changes in the trading climate and taking
decisive and immediate action. One does not need to be an
aerospace engineer to fly a plane, and it is probably better that one
is not. It is crucial to focus all attention on flying the plane, rather
than mulling over esoteric issues, such as laws of motion,
aeronautics, or other theoretical factors that keep the plane up in the
air. It is crucial to focus all attention on just flying the plane. Traders
should also just focus on trading, rather than pondering similar
impractical issues, such as the validity of the random walk theory.
Dr. Schiebe notes that the search for drama is not restricted to
amateur investors, but extends to professional money managers as
well. All professional money managers are aware that the vast
majority does not outperform the indices. They would be better off
purchasing a representative set of shares and just leaving it alone for
a year. They could go fishing, relax on the beach, or climb a
mountain, do anything but touch the investments. By doing so, their
funds would at least match the annual growth of the index, which is
better than what most fund managers achieve. So why do they not
do so? It is the need for the drama. It is not very exciting to leave the
investments alone. They sought out exciting professions as fund
managers, and so they continue to go to work every day, try to beat
the index, and add more drama to their lives, even though the
majority would do better to just leave the funds alone.
Do not follow the crowd! You have been warned over and over. It
seems easy, but it is harder than it looks. We are all familiar with the
rebel, the person who breaks all the rules and is sceptical of the
status quo. At the other extreme, the ultra-conformist seems to
follow the rules too blindly. Neither extreme is optimal for trading. It
is necessary to find the right balance between these two extremes. It
takes a great deal of trading experience, self-searching, and a firm,
concerted effort to act independently, but it is essential to develop
this skill.
Early in the trading day, it is useful to "warm up" and "feel out" the
situation. Make a few small trades, for example, 10% of your normal
lot size. (And by all means, limit your risk by trading a detailed
trading plan.) Putting on a small position usually helps you focus and
see the subtle impact of the market factors that may be helping or
hurting you. After you have entered the market, see if the trades are
working out. See how well your indicators and other trading tools are
working, your "fellow team mates." Did they identify a good trade
setup? See if you can "feel" the rhythm of the market. Are you in
synchrony with it? Are you moving with each ebb and flow? Make
sure you have entered the zone.Some days may not be as good as
others. Even the star player of the team gets bumped if he or she is
having a bad day on the court or playing field. There are times when
even the best athletes get stuck in a slump. It does not make sense
to keep trying, when in all likelihood, your mind-set will keep you
from performing at your best. That is why it is useful to see how well
you are doing at the start of the trading day. Are you in sync with the
markets or is your "game" off. Many seasoned traders suggest
standing completely aside when one is not having a good day.
Perhaps you have a good "feel" for a specific share, but not the rest
of the market. You may feel that things are going against you.
Perhaps, you keep scratching trades. Scratching trades is all right to
a point, but if you scratch too many trades, you will feel the losses
eventually.
Ultimately, it may be a good idea to take a long break, try again later,
and see if you can find a time during the trading day when everything
is going your way. And if you still cannot get in sync, you may want to
take the rest of the day off. When it comes to developing the proper
mind-set for trading, it is sometimes useful to approach trading in
the same way an athlete approaches playing a sport: Warm up first,
and see if you can get in sync and play in the zone. Novice traders
may need to gain extensive experience before they know if they are
really playing in this peak performance state. But with time, they will
learn to get a feel for when they can apply their skills and tools
effortlessly to score big profits. Experienced traders know when they
reach this optimal performance state. If you have not developed this
ability yet, do not worry, with time and experience, you will learn how
to "warm up, assess your team-mates and opponents," and get in
sync with the market.
Few things appeal more to our sense of greed than a hot share-tip.
Sometimes it comes in the form of a phone call: "I have got a buddy
who works for Ajax Widgets," the tipster will tell you, "and he says
that the company is going to announce a huge deal with China next
week." Or you might be playing golf and someone in the foursome
mentions that she has just bought 10 000 shares of XYZ Corp.
because her broker says some "big news" is due out on the company
"any day." Or a friend of your friend's lawyer confides that the "ink is
dry" on a deal that will seal the acquisition of one company biggie by
another.
Even if one has the skills to make R1 000 a day, when opportunities
are available, it may not be a good idea to conceptualise your goals
in this way. Consider the consequences of such a strategy. Suppose
Monday's trading session comes to a close and one's Profit/Loss
statement remains unchanged. On Tuesday there will be a strong
need to make R2 000 so as to stay on track with the R 1000 per day,
R250 000 a year goal. But if there are no trading opportunities, the
objective again will not be achieved. Not only will you fail to make
profitable trades, you will spend a tremendous amount of your
capital on brokerage commissions. And your stress level will be
elevated as well, potentially starting a never-ending cycle of
frustration and disappointment. So after spending hundreds on
commissions on Monday, and possibly losing a little capital on poor
trading opportunities, what happens if Tuesday is also a poor trading
day? At this point, it is quite likely that the majority of the move will
take place overnight and a trader will be "forced" to evaluate the
market at levels far beyond the previous day's settlement. Inevitably,
the market will then move erratically for the first 30-minutes and
then "fall asleep" for a number of hours, creating even more
frustration, which is further intensified when one continues losing
money and falling behind the goal of meeting the R1 000 a day
objective.
How can this potential pitfall be avoided? Remember that you do not
have to trade every single day. Winning traders patiently wait for
market conditions where they know they can excel. If the market is
quiet, they wait for optimal market conditions. They understand that
the same quiet market will handsomely reward traders who are
patient. They understand that forcing the markets to move to their
levels is not a blueprint for success. It is also useful to remember
that all that really matters is performance across a series of trades.
Many traders can lose 60% of the time, four days a week, but on that
fifth day, a winner of many thousands quickly offsets nominal losses
accrued across a series of trades. When you are setting goals, it is
vital that you keep them in perspective. Goals are useful when set
correctly. Set goals that match your skill level. Shooting for goals
that are beyond your skills will frustrate you more than motivate you.
Also remember that you cannot impose your will on the market. You
do not know what market conditions will be until you see what they
are. And if optimal conditions are not there, you cannot do much
about it. You must accept what the market is willing to give you,
which may mean patiently waiting for conditions to change. By doing
so, you may not profit every single day, but over the long run, you will
be a consistently profitable trader.
Does this scenario sound familiar? John anticipated that the share
would go up, but when it went down, he did not follow a trading plan.
He was ready to accept whatever fate offered. But "all is well that
ends well," right? Well, maybe not. John did make a big profit, but at
what psychological cost? He did not have a clearly defined trading
plan. He put on a trade, and as a result of pure luck, he made a
profit. Such situations may provide short-term pleasure, but they can
adversely influence discipline in the long term. Rather than
developing a well-defined trading plan, following it, and getting
rewarded by trading it, a trader puts on a trade haphazardly and is
coincidentally rewarded. In this case, a lack of discipline is rewarded,
and this unjustified reward may increase a trader's tendency to
abandon trading plans in the future because he or she has been
rewarded for doing so in the past. However, the positive outcomes
are usually short-lived, and a lack of discipline ultimately produces
trading losses. It is useful to distinguish justified wins from
unjustified wins. A justified win is when a trader makes a very
detailed trading plan and follows the plan. A win that results from
following a trading plan is justified and reinforces discipline. An
unjustified win occurs when a trader does not make a plan or drifts
from the plan. He or she may be rewarded, but the outcome
occurred by chance. The win is unjustified and can reinforce
undisciplined trading.
Cultivating discipline is vital for consistent and profitable trading.
Trading is basically capitalising on chance. One implements proven
trading strategies, over and over, so that across a series of trades,
the strategies work enough to produce an overall profit. It is like
making shot after shot on the basketball court so as to accumulate a
winning number of points. The more shots you take, the more likely
you will amass points. But the winning player is the person who first
develops the skill to make the shot consistently, so that at every
possible opportunity, the ball is likely to go through the basket. To a
great extent, consistency is key. If the player uses one approach one
time, and a different approach at another time, performance is
haphazard. It is the same for trading. One must trade consistently,
following a specific trading plan on each and every single trade. This
allows the law of averages to work in your favour, so that across the
series of trades, you will make an overall profit. If you follow the plan
sometimes and abandon it at other times, you throw off the
probabilities. Suppose you used a strategy that had a track record of
80%. Under the best-case scenario, you could only expect to win
80% of the time. But since history does not always repeat itself, it is
likely that you will win less than 80% of the time. If you do not
execute the trading strategy the same way each time, you will
decrease your winning odds. And fewer winning trades may mean an
overall loss. That is why discipline is so important.
How does one live in the moment? Perhaps the first step is just
intellectually considering the existentialists' proposition that anxiety
is sometimes a matter of focusing on, and mulling over, the past, or
worrying about the future. When you consider it, it seems reasonable
to think that if one could just forget about the past and avoid thinking
about the future, one will live in the present. It seems unrealistic and
perhaps a little reckless, however, since it is often prudent to both
learn from past mistakes and to make sure you avoid potential
adverse events. But again, when you do so, it takes you out of the
moment. You start to analyse and remove yourself from the on-going
experience rather than enjoying it. In contrast, trying to stay in the
moment will keep you focused on the trade. And by focusing all your
energy on the trade of the moment, you will reach that higher level of
awareness where you will see the market more clearly and be able to
run through all possibilities at lightning speed.
These concepts sound good in theory, but how does one put these
ideas into practice? Well, first it may all depend on how many past
conflicts you have in the back of your mind and your self-esteem. If
you are unsure of your abilities, it is hard not to worry about the
future, especially when you are facing extreme pressure in the midst
of a trade. If you are easily shaken by uncertainty and stress, your
mind will tend to wander toward your past mistakes and regrets and
you will tend to question your ability to control your destiny. But, if on
the other hand, you are especially confident, you are not likely to be
troubled by your past, and can more easily live in the moment. That
said, it may be extremely difficult for some people to live in the
moment for very long, or to stay there and completely cast aside all
past regrets or worries about the future. One can strive to reach this
state of existence for a short time, however, at least long enough to
evaluate a trade and take decisive action. The first step is to monitor
one's thoughts and identify instances where one is mulling over the
past. The second step is to actively try to push such thoughts out of
one's awareness. For example, one may think, "I wish I did not lose
so much money on my last trade," or "I am frustrated that I have had
so many losing trades." One may think these thoughts throughout
the day and it is difficult to just shut them out. But it is definitely
possible to put them aside for about an hour, while you monitor a
trade and decide what action to take next. One may similarly worry
about the future: "I wonder if I will keep losing or will I finally make
huge gains?" After one is aware of the kinds of thoughts that indicate
one is mulling over the past or worrying about the future, such
thoughts can be pushed aside temporarily. It may be necessary to
yell "stop" or think, "Do not think about that right now; I can consider
these issues later, after I am done evaluating my trade." Now, using
these strategies would not put you in that ideal mental state where
you are completely in the moment, but it will help you get to a mental
state that is close to the ideal. It may take some practice, but you
can eventually reach this mental state (and if you have some
difficulty, always consider the possibility of seeking out some
professional help from a trading coach). The best traders are not
self-conscious about their mistakes. They don't regret past mistakes
or worry about the future. They live in the moment. You can also live
in the moment, if you practice cultivating the proper mind-set. When
you reach this peak level of experience, you will not only be more
profitable, you will enjoy trading, and find it to be fulfilling in its own
right.
Take responsibility and take control
The prominent psychologist Dr. Julian Rotter noted that there are
basically two ways to understand and interpret events in one's life:
One can attribute the cause of events to internal forces, such as
hard work, talent, or ability, or one can attribute the cause to external
forces, such as luck or fate. When one looks for internal forces, one
tends to take full and complete responsibility for an outcome. For
example, one may say, "I made a profit on the trade because I
prepared properly, waited for the right signals, and traded my plan."
That is an explanation based on internal forces. For a winning trade,
it is easy to explain the outcome with internal forces. We have a
natural tendency to build ourselves up and enhance our ego when
we win, so it makes us feel good when we do well and believe it is
due to our talents and skills. But what about a losing trade? When we
lose, it is also due to our talents and skills, but in this case, it may be
a lack of talent and skills. Such a possibility is harder to accept.
When faced with a defeat, most people suddenly switch from looking
for internal forces to looking for external forces: "The market
conditions changed too quickly. The market makers are manipulating
the price again. I should not have taken the advice offered by that
uninformed research analyst. I was unlucky." It is easier to find an
excuse than take full responsibility when faced with a loss. It is at
these times when most of us tend to look at the world in a self-
serving way, attributing our success to internal personal
characteristics, but our failures to external situational causes.
However, there are advantages to bucking our natural instincts and
always taking full responsibility for both our triumphs and defeats:
One gains a sense of power and complete control.
Time flies - but it is only fun when you get work done
Do you feel that your time is basically without structure? Do you feel
as if you put in a lot of effort, yet are not making adequate progress
toward your goals? When you look back at your daily activities, do
you question what you are working toward? If you answered "yes" to
any of these questions, you probably feel time pressure, and may
have a problem with time management. You may feel confused and
unorganized, and this may produce unnecessary stress. If you have a
problem with time management, you may want to try a few simple
time management strategies to structure your time, and relieve some
of the time pressure. An important step is setting clear priorities.
Your priorities as a trader, however, should be based on whether you
are a novice or advanced trader. A novice trader, for example, should
devote a fixed amount of time to learning about new trading
strategies, while a more seasoned trader may know which specific
methods he or she will use and can devote less time to this activity. It
is also important to set a specific amount of time aside for each goal;
otherwise you may spend all your time on one goal at the expense of
others. For example, one cannot merely study trading strategies
without testing them out in the markets, so it is important to set
aside time for both learning about new strategies and actually
trading them. However you spend your time, it is essential that you
set time limits for each goal, and that you monitor the amount of time
you spend on each one. As you systematically complete each task,
you will naturally reward yourself, and at the end of the day, you will
feel that you have achieved a meaningful goal. And in turn, you will
find that you will enjoy the process of trading. Rather than merely
looking at the equity in your account as the all-important gauge of
your performance, you will gain a feeling of mastery just by
completing various tasks you deem as valuable for developing your
skills as a trader. Everything will start to feel as if it is coming
together into a whole.
Avoiding caffeine,
Exercising regularly,
Minimizing daily hassles and
Seeking out social support.
Caffeine helps many people wake up in the morning, but it may often
elevate your nervous system to the point of making you hyper-alert
to the slightest form of stress. Trading is stressful enough; it is not
useful to pre-elevate your nervous system and feel a heightened
sense of anxiety. Tension can also be reduced through regular
exercise. Tension builds up during the trading day, and a regular
exercise program ensures that pent-up frustration and tension are
released, and do not build up to influence subsequent trading
decisions unexpectedly. It is also important to reduce stressors in
your environment. Daily hassles, such as time pressure, traffic
congestion, or feeling over-extended can build up psychological
tension and loiter in the back of your mind. Try to minimise these
hassles and relieve the pent-up tension. But however you cope with
daily hassles, do not ignore them; do not try to pretend they are not
important enough to deal with immediately. They can accrue and
cause you great strain in the long run.
Many times it seems impossible to just shrug off the past. After all,
are we not the products of our past histories? Although this belief
may be true to some extent, it can be limiting. If we believe we are a
product of our past, it is tempting to further believe that our past
dictates our future performance. But this is not necessarily true. Past
performance need not dictate, or even influence, future
performance. Psychologists who study optimal performance have
discovered that individuals who achieve success tend to focus on
the here-and-now, the immediate experience. Focusing on the past
often causes anxiety. It precludes you from paying enough attention
to your immediate experience, and the opportunities for success that
are immediately ahead. A strong focus on your immediate
experience, the here and now, is vitally important for your trading
success.
First, people think they can make dramatic changes when modest
change is more realistic. People reject more modest, achievable
goals for ones they cannot possibly achieve. Since their expectations
often exceed what is feasible, they fail quickly, feel disappointed, and
just give up. An obvious example in the trading arena is expecting to
make huge profits with inadequate capital. It is essential to work with
a trading coach or adviser to develop realistic goals. A second
reason people fail is that they underestimate the time it takes to
make a substantial change. For example, novice traders assume they
can trade profitably in a matter of months, whereas seasoned
traders emphasize that such changes may take years. A third and
related reason people fail is that they think change is easier than it
actually is. It is hard to change. It requires a heroic effort, yet most
people think only minimal effort is required (It is like thinking you can
trade profitably by treating trading as a hobby rather than as a
business). And similarly, it is hard to master trading. There is a
powerful human tendency to over-estimate one's ability level, to
overconfidently think that one has skills and abilities that one does
not yet have. Do not ever underestimate the tendency to be
overconfident. Conquer the tendency to trade beyond your skills by
cultivating a sense of healthy scepticism regarding your trading skills
and your trading strategies. And remember, behaviour change is
harder than you think.
Taking precautions
Have you ever had one of those days when everything went wrong?
You may have had a string of losing trades or had a bad dream the
night before, but you woke up on edge. When you are on edge and a
little anxious, everything can seem to start to go wrong. You may not
get a proper order fill, or you may misread information, and then your
equipment may malfunction. Suddenly, you are unable to regain your
composure and trade in a focused, logical state of mind. At times like
these, the only way to recover quickly is to take precautions to
prevent a worst case scenario getting the better of you. In his book,
"Mastering the Trade: Proven Techniques for Profiting from Intraday
and Swing Trading Setups," John F. Carter shares his office
arrangement, and tells readers how he takes precautions. Mr.
Carter's office consists of multiple computers. He has one computer
dedicated to emails, instant messaging, and searching the Internet.
He notes that this computer is likely to be attacked by viruses and
spyware, but since it is not used to execute trades, when it becomes
disabled it has no bearing on trade execution. He also has a backup
laptop that is attached to a dialup modem connection. Should the
electricity go out or the broadband Internet connection fail, he still
has access to his trading accounts and price quotes. Mr. Carter
represents the trader who is prepared for any circumstance. Should
one of his computer systems fail, he has a backup system.
You can control your energy level by eating right and getting enough
sleep.
You can control your feelings of anxiety by avoiding caffeine and
exercising regularly.
And you can avoid serious losses by managing risk and trading high
probability setups.
It may seem obvious, but many traders fail to take precautions. They
trade by the seat of their pants and when something goes wrong,
they blame it on anything or anyone but themselves. We cannot
control everything, but it is vital to our survival to control what we
can and accept what we cannot. Taking precautions is a significant
way that you can increase your chances of achieving financial
success.
Fearless and profitable trading
It is not whether you win or lose but how you play the game. This old
adage is especially relevant to trading. Many novice traders assume
that winning is the only thing that matters, but what they soon find
out is that profiting over the long-term requires discipline and trading
well developed trading plans. Sure, you can capitalise on chance and
make a few winning trades here and there, but you can only win in
the long run by developing a trading plan and following it.It is
important to distinguish justified wins from unjustified wins.
The markets have been bullish recently, but that is still no guarantee
of profitability. The only sure path to profitability is through hard
work and persistence. First you have to find a high probability trading
setup. Next, you have to patiently wait for ideal market conditions
and get in and out at the right times. And if everything goes well, you
take home profits. Most of the time, though, you have to face
setbacks and losses, and unless you are persistent, you can feel like
giving up.
For the past week, shares have been on the rise, reaching new
heights, but how long will it last? If you get in now, you may end up
selling as a turning point happens, and may end up as merely one of
the many sellers looking for buyers who just are not there. The only
way to ensure profitably is to work hard, search for trading setups
and execute trades with discipline.
It can be hard to find the proper motivation at times, especially
during a sideways market. But the way the markets have been
behaving lately should motivate you to believe that if you execute
enough trades, you will take home profits. It is at times like these that
you can trade in earnest until you hit upon a winning streak, and
when you get in the zone, push yourself to the limits. But at the same
time, do not get overly confident. Sure, the markets have been on
the rise, but that does not necessarily mean you can buy a share at
the wrong time and profit. The overconfident trader, however, falsely
believes that trading is that easy, especially after a big windfall. Do
not let the exuberance of the past week give you a false sense of
security. It is vital to approach trading with a sense of optimism, but
temper your optimism with caution.
The great trader Jesse Livermore blew out his trading account more
than once in his illustrious career. It is scary to think about, but if you
want to become one of the few who reach the top in this business, it
is necessary to face the possibility that you may blow out your
trading account. Many seasoned traders have had to start over more
than once. You may not be immune to this ailment. Just like all top-
notch traders, you may need to pay your dues and learn what it is
like to lose and come back.
Tom, a long time market observer once noted, "I have yet to meet a
successful trader who has not paid his dues." Tom observed that
every successful trader has blown out his trading account and
learned how to recover from it. "Take the best traders in the
world...they have blown out. If trading was easy, everyone would be
trading and everyone would be making money. You have to pay your
dues. Some people are lucky and only pay those dues for a very
short period of time, and others are going to pay their dues for a very
long time."Another seasoned trader, Dan, described how he lost big
before making a comeback: "One time I lost virtually everything in
one or two days, and a good friend of mine came over to make sure
that I was not going to do something stupid. ... I told him, 'It is only
cash. It is not my life that I lost. I can get it back. It is not the end of
the world. I am not losing my house, my car, my credit cards, or my
friends. I made a mistake. I am angry that I made a mistake, but the
cash has nothing to do with it."
The trading lore is replete with similar stories. One young, promising
trader, for example, lost so much money that his brokerage decided
to fund him to make back what he had lost. Even the best traders
blow out. Why? For some it is merely mathematics. They are under-
capitalised and end up spending what little earnings they make on a
few wrong trades and on trading commissions. They never had a
chance. Other traders are overly impulsive. In a sense, the old adage,
"you have to risk money to make money," is true. To make big profits
and turn a small account into a large one, it is necessary to take big
risks when a once-in-a-lifetime trade comes along. That said, you
may also be taking a big risk that has dire financial consequences.
There is no one right way to trade. If you want to make it big in the
trading business, you may need to take risks. But you should be
ready to deal with the consequences. Other traders may want to play
it safe by trading small and building up their trading skills and trading
capital before scaling up to make those bigger, riskier trades.
Whatever you decide, it's necessary to keep up your spirits on the
one hand but be ready to pay your dues on the other. You can make
it if you stick with it, but everyone has to put in the required time and
effort, and learn to pick yourself up after a setback.
First, what is your hit rate? How often do you make money? Is it 20%,
10% or less? It is necessary to look at your past record and calculate
a rough estimate with regard to the percentage of trades you make
that are winners. This is not the only statistic you should look at, but
it does suggest how well you are doing. The downside of relying on
just this one indicator is that subconsciously, or in the back of your
mind, you may want to increase your hit rate by making a few small
profitable trades. For example, if out of 10 trades, you make eight
losing trades, you might be tempted to make two winning trades,
even if it is just R20 per trade, to make yourself feel good about
having a 20% hit rate. Obviously, the 20% estimate is off. It means
essentially nothing if you lost R10 000 on the eight losing trades!
That is why you must also compare the amount of money you lose
on your losing trades to the amount of money you gain on your
winning trades, what some traders call the Rand-based win-loss
ratio. Psychologically, this is a much harder statistic to calculate than
your hit rate. It is hard to look at just how much you are losing
compared to how much you are winning. Many traders prefer to
deceive themselves. They focus on their winning trades, but ignore
their losing trades. You can feel like a super-trader if you focus solely
on the winning trades where you made huge profits, while ignoring
losses. All you are doing, though, is fooling yourself. For example,
who cares if you made R30 000 on your winning trades if you lost
R35 000 on your losing trades and had to feed your trading account
R5 000 last year to make up the difference? It may be hard to put
your pride and ego aside, but unless you take an honest look at your
Rand-based win-loss ratio, you will not have an accurate gauge of
your performance.
Have you ever been on a diet and eyed a piece of chocolate cake? Or
perhaps you had decided to cut back on expenses, but could not
resist buying a new pair of shoes. We all have our addictions,
whether it is gourmet food or fast cars. It is human to want to seek
out fun and excitement. You work hard. Why should you not play
hard? The problem, though, is when a trader starts trading like an
addict. Addictive traders seek out thrills, even if it means losing
money they cannot afford to lose. Your long-term survival depends
on your ability to avoid seeking out thrills and remaining disciplined.
What are a few ways to stay disciplined when you need to? First,
always get plenty of rest. When you are tired, you are prone to
impulsive decisions. Do not skip sleep. It is the key to maintaining
discipline. Second, remove stress from your everyday life. This is
easier said than done, but if you feel stressed out, you would not
have enough psychological energy to maintain discipline. You will be
on the verge of seeking out a thrill to make yourself feel better. Third,
do not try to be disciplined for too long. When you try to live a
monastic life as a trader, you will eventually feel a need to alleviate
the monotony and boredom. When you feel bored, you are likely to
make an impulsive trade and lose money. The best preventive step is
to restrict the amount of time you trade. If you find it hard to maintain
discipline for an entire week, for example, then do not try to trade
with extreme discipline for two weeks. It will take all the
psychological energy you can muster to make it for the week. Do not
make matters worse by pushing yourself to go for two weeks. You
will increase the odds of making impulsive trading decisions. Instead,
trade for a week, take some time off, and then return after you've
had some time to recover. It is just like building up muscles. Work
out, rest, and go back and work out a little more. If you "work out"
your discipline muscles in moderation, you will make more progress.
So avoid seeking out thrills. Trade with discipline and you will trade
to win.
To those who want to take home big profits, trading is not a hobby. It
is serious business. If you want to make profits consistently, you
must have respect for your trade. You must treat each trade like a
business transaction. It should be well planned and deliberate. You
should follow a business plan, which outlines a strong rationale for
making the trade. You should have a realistic profit objective, and
execute the trade with a strong resolution to make a profit.
By taking trading lightly, you can always say, "It was not important
anyway; there is no reason to worry about it," whenever things do not
go your way. On the one hand, approaching trading as if it were just a
hobby will allow you to minimise the psychological importance of a
setback or a loss, but on the other hand, unless you take trading
seriously, you will never give trading your best shot, and you will
never make the huge profits you have been dreaming of. You will
always have a way out, and it will be too easy to make excuses for
things going wrong. Making excuses may make you feel good in the
short term, but eventually, you will start to realise that you are taking
the easy way out. And the more excuses you make, the less decisive
you will feel.
If you want to make profits, you must feel you are in control of your
actions. Taking a decisive approach to trading requires that you take
responsibility for all your actions. That does not mean beating
yourself up for making a mistake, but it does mean trying to gain as
much control of your trading as possible. You cannot control the
markets, and you cannot control what other market participants will
do, but there is a great deal that you can control. You can manage
your risk. You can carefully measure your trading performance, and
discover what works and what does not. You can decide which
trading setups to take and which trading setups to avoid, and you
can decide to trade only under market conditions that are conducive
to your methods and style. The astute trader distinguishes what he
or she can control and what he or she cannot control.
It may sound a little simplified, but it works for many people who
have trouble controlling their worrying. Try it. See if it works. If you
are like most people, you will find that you worry less, and can
control it. So do not let worrying interfere with your ability to trade
successfully. Worrying seems like a natural response to a setback,
but it usually gets you nowhere. Rather than hopelessly worry, it is
vital that you take an active problem solving approach. If you can
control your worrying by scheduling regular worry sessions, you will
be able to recover from a setback fast and return to profitability.
Have you ever lost yourself in a trade? You focus intensely on your
screen and wait for the ideal time to enter. You are fully attentive as
you continue to watch your screen as the price creeps up to your
profit objective. All your attention is channelled on your on-going
experience. Without even thinking, you exit according to your trading
plan. It is as if you are in a meditative trance. There are times when
everything just seems to click. Many trading experts, such as Mark
Douglas and Dr. Ari Kiev, call it "trading in the zone."Trading in the
zone is a peak performance mental state. It happens when you
engage in a task that requires your full attention and skill. The task is
not so hard that you feel anxious about it, but it also is not so easy
that you are bored. There are times when every trader enters this
peak performance mind-set. How do you get there? For one thing,
you need to feel calm and relaxed.
It is not possible to always trade in the zone, but when you do, it is a
peak experience. At that point, you will reach a state of bliss. So
increase your odds of trading in the zone. Appreciate the process of
trading. Do not focus on the prize. Do not worry about past mistakes,
and avoid worrying about the future until it happens. By appreciating
an on-going trade moment by moment, you will not only have more
fun; you will end up more profitable in the long run.
Affirm to win
You can make up a set of affirmations for any trading issue. For
example, suppose you have trouble patiently waiting for a trading
plan to pan out. Under these circumstances you might say, "I have
willpower. I am in control. Winning traders are disciplined. I have
made my trading plan, and I can follow it and wait to see what
happens. I can learn to trade with discipline. The more I practice
discipline, the more disciplined I will become. With each trading plan
I successfully follow, I will gain more self-control. Over time, I will
become stronger, decisive, and able to control my emotions."
Affirmations can also address a more general issue, such as low self-
esteem. Some traders manifest low self-esteem by defining their
self-worth by their net worth. They may feel on top the world when
they make a winning trade, but worthless and inadequate when they
lose. Affirmations can help matters. A trader with low self-esteem
may affirm, "I am human, and as a human, I have self-worth no
matter how much money I have or how many losing trades I make.
My worth is not defined by whether I win or lose. Trading is not my
entire life. Winning or losing does not define who I am."
Affirmations are personal. What you write down and recite is up to
you. Affirmations should inspire you, guide you, and motivate you.
But whatever you write down and repeat to yourself, it should
address your desires, goals, and reasons for trading. At first glance,
repeating an affirmation over and over seems like an inconsequential
solution, but try it. You will find it does wonders for your motivation
and your mind-set. Soon, you will find that you do not have to
consciously repeat the affirmations; you will think of the positive
statements automatically. Over time, you will train your mind to think
positively. You will approach trading with a winning mind-set that will
help you achieve enduring financial success.
Trading can be tedious at times. Day in and day out you have to look
for market opportunities, and once you find them, you have to put
your money and a little bit of ego on the line, and suffer the
consequences, good or bad. If your heart is not in it, you will
eventually join the disillusioned minions who have left the trading
profession. To make it as a trader in the long run, you must love the
process of trading. You must think it is so exhilarating that you would
do it for minimum wage if that were the only way you could trade. It
is not about the prize. It is a calling, a noble mission.
Koppel and Abell list some important goals that novice traders
should set. It Is important, for example, to learn to control your
emotions. Many traders act emotionally rather than rationally. They
also have difficulty taking losses. It is necessary to take losses
quickly and easily, rather than dwell on them. It is also important to
develop a trading system that is consistent with your personality. All
traders should also limit their risk. These are just some examples,
but with each of them, it is essential to strive to achieve specific
goals every day. On some days, you might just try to set a
performance goal. You might practice a trading skill you are trying to
hone based on a standard you personally define as adequate. On
other days, you might try to achieve a specific outcome, and see
how well you do. It is vital, however, to set clearly defined goals, and
enthusiastically pursue them. Log your advancement, and reward
yourself when you make significant progress.
Winning traders know how to tolerate risk. Trading outcomes are far
from definite, but they do not mind. They have no problem putting on
trade after trade and doing so with grace and nonchalance. Not
everyone can live up to this standard, however. Many novice traders
have trouble taking a risk, even a small one. They either avoid
executing a trade, or when they do, they find it excruciating to
monitor the trade as they wait to see if their profit objective will be
reached. Depending on your background and personality, you may
have trouble tolerating risk. But do not let it dash your hopes of
making profits. You can develop a way to work around a low
tolerance for risk.
There is one last thing you can do: Accept the fact that should the
market go against you, you will definitely lose the portion of capital
that is not protected by your stop-loss. In the end, you must accept
that you may lose. One of the main reasons people have difficulty
taking a risk is that they are afraid of the consequences of a potential
loss. They wonder what they would tell their spouse or their parents
should they lose. They wonder what they would need to do to make
back the lost money. It is vital that you trade with money you do not
mind losing. If you can truly believe that losing the money is no big
deal, you will be able to tolerate the risk, even if you have extremely
low risk tolerance. But if you cannot afford to lose the portion of your
capital you are risking on the trade, do not risk it. You will never be
able to convince yourself that it is a good idea, and if you have low
risk tolerance, you will just be putting yourself in agonising pain.
Extremely low risk tolerance can severely hamper trading, but if you
take the proper precautions, you can still trade profitably. By finding
a trading style that suits your personality and only risking money you
can afford to lose, you will feel calm enough to trade freely and
profitably.
Johan tells his trading coach, "Just show me how to make big profits.
I am running out of time and money, and I just need to achieve
financial success and get on with my life." Many would-be traders
think this way. Trading coaches and instructors will tell you that of
the masses that dabble in the trading profession, many do not want
to put in the time and effort to master the markets. They are looking
for a get-rich-quick scheme or they erroneously think trading is easy
money. But making money in the markets cannot be approached like
a hobby. You cannot take it lightly. Sure, you will make a few wins
occasionally, but in the long run, you will end up losing more than
you make. Some amateur traders do not care, and that is fine. They
feed their trading account every month and see trading losses as the
price they pay for entertainment, the same way visitors to Sun City
gladly spend money on recreational gambling. But if you want to be a
serious, active trader, you are in this business to make money, and
that means making a solid commitment to achieving success.
Trading capital is not all you need. You also need the right
equipment: adequate computing power and solid, reliable methods.
Money can buy you the equipment, but trading skills? That is where
you have to make the largest commitment. You will have to study the
markets, and appreciate the beauty in how they work. You must see
them as exciting to the point that you would study market action
even if they did not have a Rand on the line. Most traders fail
because they just do not love the study of the markets enough. They
are motivated by the goal of making huge profits rather than the
process of trading. Trading is not a hobby or an easy way to pay the
bills. It is a lifestyle, something you have a passion for. It may take
years to master. Not everyone makes it within a few years, but that is
all right. As long as you love what you are doing, you will achieve
success in the end.
Many novice traders work under the assumption that because they
are putting their money on the line to pursue trading, they should
give it their all. Is it necessary? A study was conducted and it
suggested that it is not. A group of traders was asked to fill out a
questionnaire regarding their emotional mood. The sample was
divided into happy and unhappy traders and they were compared.
Compared to unhappy traders, who reported a tendency to feel
disappointed, frustrated, and discouraged, happy traders reported
that they enjoyed the process of trading. They liked the intellectual
challenge trading provided. They enjoyed learning about how
companies made a profit. They enjoyed learning about new
investment (https://www.psg.co.za/wealth/investments) strategies,
and enjoyed learning about how people made money in the markets.
Have you ever had one of those days where you wished you had
stayed in bed rather than executed your first trade of the day?
Perhaps you excitedly put together a trading plan the night before
only to get a poor fill when the markets opened the next morning.
Maybe you were just in a bad mood and frustrated that nothing was
going right. Some seasoned, trading experts warn against trading
while upset or frustrated. You may be prone to making mistakes.
Many times, it is better to just stand aside. But walking away can
make you feel as if you have been defeated. And if you stand aside
too often, you may feel as if you are not giving trading your best
shot. It can feel as if you are prematurely walking away from a
challenge rather than gaining new experiences or learning how to
overcome new obstacles. It may not be a good idea to stubbornly try
to trade in market conditions that are not conducive to your trading
style, but there is a compromise: You can move from a "doing" mode
to a "being" mode. Rather than force yourself to actively trade, you
can just relax and appreciate the complexity and beauty of the
markets.
During the trading day, and often during off-hours, we are consumed
with doing whatever we can to make a profit. We plan, anticipate,
and find solutions to trading problems. We search for a winning
trading strategy, even if it means ineffectually coercing ourselves to
find a way to profit from the market action. But trading is a creative
endeavour. It is a combination of looking for historical chart patterns
and using your intuition to decide whether history is actually going to
repeat itself at this time and at this moment. When it comes to using
your intuition and creative skills, you have to be free, open, and
ready to accurately perceive what the markets are doing. It is an art.
You cannot force yourself to be creative. You have to let a creative
idea come to you. But when you are upset, frustrated, and forcing
yourself to find a winning strategy, you often choke under the
pressure. You are closed off. You cannot see what you need to see.
When you are having a bad trading day, you cannot see clearly. You
can be stuck in a "doing" mode, trying to take action, and frustrated
because you cannot figure out what do to next. You can get caught
up trying to find solutions and taking decisive action, and get
mentally overloaded with details. You are overly emotional. You are
frustrated and overwhelmed. When things get that bad, you just
cannot think clearly enough to actually take action. The solutions to
problems do not come easily, and it is quite possible that you will
make trading errors. Is it time to give up? Maybe. But an alternative is
to move from a "doing" mode where you are trying to take action to a
"being" mode. Rather than trying to execute a trade, which is the
main concern of the "doing" mode, you can try to merely observe
and study the markets. Rather than try to take charge, you can be a
mere observer. Rather than pushing yourself to figure out what trade
to execute in the next few moments, you can settle for merely
observing the markets. You can take a rest, relax, and just study the
markets. When you fully commit to avoid making a trade in the next
few moments, and are content with merely being a student of the
markets, you will free up psychological energy. As you start to calm
down, your creative juices will flow freely again. Suddenly, solutions
that eluded you in the "doing" mode become obvious while in the
"being" mode. You will once again feel free and creative, and when
your head is a little clearer, so are your perceptions and intuitions.
Soon, you have moved from mental stagnation to trading in the zone.