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It's All in Your Head Part 3: The Final Chapter
Written by article default Wednesday, 22 December 2010 11:51
In September of last year, I wrote two articles entitled, "It's All In Your Head..." and "It's All In your Head Part 2: The Fear Of Loss." My final words in the second article stated that I didn't intend for there to be a third and final installment of this self-penned trilogy, but over a year on and with more market trading hours under my belt and a whole host of fresh students under my wing, I thought to myself it was about time I revisited this particular favorite topic of mine and here we are again. As many of my readers will know, I like to keep my trading activities as simple and objective as possible, as this helps me to cut out the noise of over-analysis and emotion and helps greatly in the final decision making process. I have come to realize that in the long run, true trading success is not defined by one's hit rate of winners, the strategy employed nor the capital management alone, but rather it lies in the mental stability the individual market speculator is able to maintain consistently.In essence, trader psychology, in my humble opinion, accounts for around 90% of overall market success for any trader across the course of time. One could argue that risk management itself is perhaps greater in importance and in many ways, I would whole-heartedly agree; however, I would also argue that in reality, an individual trader's true capital preservation practices are a direct result of their own personal appetite for risk, which in turn is derived from their psychological profile in the very first place. Before taking any action in the marketplace, a trader needs to fully understand their individual comfort levels and what they deem to be acceptable parameters of risk. Some of us have a tendency to take larger financial risks in the quest for gains, while others prefer a more cautious approach in their day-to-day trading activities. With this in mind, the true question we should all ask ourselves before even contemplating the practical advantages of risk management is, "At what point will my losses make me uncomfortable?" I pose this question simply because after a potential run of successive losses, the average human being can't help but feel that they have been cheated in some way by the market, and this misconception can play havoc in maintaining sound and disciplined trading executions. The ability to analyze and place each and every trade with no concern for past outcomes is vital in the longer term. If one takes losses to heart and these draw downs in some way blur the emotional stability of the trader, we need to question and address the ability for said trader to continue with consistent trading decisions. The last thing a speculator needs is to change their plan midway through the month as this skews the lines between objectivity and subjectivity.
So, in this final chapter of my run of trader psychology "specials," I will outline a selection of the key aspects which we should all take into account and work on in our mental trading game so as to overcome the common hurdles which any of us can fall victim to:
Discipline
First we need to learn to stick to a well-constructed and researched trading plan at all times. If this cannot be achieved consistently, there is really no point in moving forward at all. Each and every trade should be taken for reasons dictated to us by our plan, nothing more and nothing less. Anytime we deviate from this course of action, we run the risk of emotionally trading or relying too much on our gut feelings. A trader can't ever hope to control the market, so instead, they need to learn to control themselves at all times. Common issues arise when trades are taken on a whim or when an individual craves the need to be right in a position and removes their stop loss order to prevent the losing trade being closed out. And if you ever feel the need to get back at the market after a loss, then walk away or move on to another currency pair straight away. Control your trading frequency and preserve your capital. Remember you need cash in the account for the next day.
Integrity
Ask yourself right now, "Am I consistent in my trading actions?" If the answer is no, then I suggest you make the best efforts in your actions to be consistent right away. The real difference between a novice and a professional trader is that the latter knows the rules and sticks to them, while the former knows the rules and tends to ignore them. If we fail to stick to a detailed plan of action, we in turn fail to acquire a consistent and measurable set of results to analyze our performance with. I always tell my students that a goal without a plan is really nothing more than a hopeful wish.
Diligence
This area is fundamentally centered around your growth and evolution as a trader. A huge error to make is to assume that we know it all, no matter how many years of experience we are carrying. I am not perfect and I never will be and I am the first to admit it. I know what is required to be successful in the markets and I have a plan which I have been sticking to for a number of years, but this does not mean I will sit back and rest on my laurels. Instead, I understand that while I won't deviate from my plan, I am also willing to better myself over time. The very best lessons I have learned about trading have come from my very own experiences in the market. I am open to new lessons and insights at all times and willing to learn and develop my skills further whenever I can. I realized a long time ago that no matter how long I stay trading, I will forever and always be a student of the market.
Patience
No trader can move the market or force it to do what they want it to. Often, there will be times when there are no solid low risk, high reward trades on offer while other days there can be way too many to choose between. Whatever the scenario we are faced with, we need to wait for our entries and trades to present themselves to us when they are good and ready. I can simply pull a trade out of thin air if there is nothing to choose from. Many novice traders make the mistake of assuming that everyday will be full of perfect setups and this, in no way, is the reality. Allow price to come to you instead of just jumping in for the sake of it. And if you were thinking that the more hours you spend in front of a screen, the better you will be, then you have been truly misinformed. Take time in developing your skills as this is far more proactive than staring at a range bound market hoping to see something you may have missed. We all know Rome wasn't built in a day after all.
Effort
I would be a liar if I said trading did not involve some level of hard work and effort. In all aspects of life, if you want to be good at something, it takes commitment and time to learn your craft. This is certainly no "get rich quick scheme" and I advise you to ignore anybody who tells you otherwise. If you have aspirations of just rolling out of bed, clicking a few buttons and doubling your account in the blink of an eye, then I am sorry to say that you are misguided. Don't fall into the trap of thinking trading is easy, but take comfort in knowing that it can become easy over time, only if you keep things simple. Anyone can be taught by a master, but this does not lead to mastery itself. That is completely dependent on the student's willingness to learn, observe, learn and make the effort. This is not a game of passive learning, but rather an art of active participation. Instead of searching for the non-existent Holy Grail, realize now that the real secret weapon is just all in your head.