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A Delicate Balancing Game

  
  Education
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“Damage control can prevent failure, but it will never elevate you to excellence.” 

“Now Discover Your Strengths”, by Buckingham and Clifton

When I ran across this quote, I was stunned. “Is that true?” I pondered. Then almost immediately I said, “Of course.”

As traders we need to do both. We need to pursue excellence even as we maintain damage control. We must protect against undue loss even as we seek opportunities for maximum gain.

It’s an emotional, artistic, and technological balancing act summed up by the trading cliché, “Cut your losses, and let your profits run.”

It’s easier said than done. How many times have you skipped a promising trade because you sought to avoid loss? How many times have you jumped out of a winning trade to secure your current profits only to despair as the trade soars into the stratosphere without you?

Computers have been programmed to play checkers not to lose, but the set up turned out not to be sufficient. In order to succeed, the computer had to be trained to play to win.

Many traders have failed because they abhorred loss and feared consequent failure. Other traders have failed because they ignored the possibility of loss in their reckless hunt for gain.

Risk management is necessary, but if it is your primary focus, you’ll have a hard time getting to the pot of gold at the end of the rainbow. On the other hand, if all you think about is the possibility of gain and overlook the potential for loss, you could find yourself falling off a financial cliff.

Trading is a delicate balancing game where optimism requires a seasoning of caution, but the primary goal still needs to be excellence and profit.

Keys to Trader Self-Talk

  
  Education
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“And the talk slid north, and the talk slid south . . .” Rudyard Kipling

What do you say to yourself when you trade? Now some of you may be thinking, “Talk to myself? I don’t talk to myself.” But of course you do. You’re talking to yourself when you think that. That’s how we think. We think in words (and sounds, pictures and feelings). But most precisely we think in words; therefore, we talk to ourselves.

When you’re considering entering a market, what are you saying to yourself? Are you saying, “What if I lose? “What if I’m wrong?” If you hesitate before entering and have trouble pulling the trigger, I guarantee you’re saying something similar to that.

Since good trading is very much about controlling the risk, often the first consideration is where to put our stops. You might first ask yourself,”What is my risk?” This is better than asking, “What if I lose?” However, it still takes your thoughts to risk and loss rather than reward and profit. If you’re hesitating when you should be entering the market, you could change your comment to something like, “How much can I make?”or, “What if this trade is a big winner?”

Of course, not everybody hesitates to enter a trade: some jump the gun and some overtrade. These people are anticipating large profits. If you hear yourself saying, “This is going to be a big move!” or “This is going to the moon!”, you’ll need to activate caution. Remember, gamblers often think they’ve got a sure thing. When you hear yourself promoting a trade, it would be wise to ask yourself, “What is my risk?” and “What would have to happen to know that I’m wrong or no longer right?” Our self-talk reveals our biases. If you’re talking up your trade or talking it down, you have a good clue that you’ve lost your neutrality. In such an instance it would be advisable to ask yourself, “What is the market showing me now? What does the market want? What do I know for certain? Have my rules for entry been met?”

If you hear yourself saying, “I don’t believe this!” Look out. You’re warning yourself that you’re not taking the market action at its face value; an extremely dangerous thing to do. Remember price is your predominant reality when you trade.

Some traders demean themselves when they trade. They speak to themselves in negative ways they would never let another person talk to them. They call themselves stupid idiots, failures, fools, losers, and so forth. While their intention in so speaking might be to motivate themselves to better behavior, it seldom does. Self-denigration rarely produces good results. Have you ever noticed that the more you scold yourself, the more your behavior reproduces itself? The strangest secret is that we become what we say. I tell my clients that I won’t allow anybody to speak unkindly to my clients, including themselves.

Much better to encourage yourself. “You can do better than this.” “You don’t need to do that again.” “I’ll do better tomorrow.”

Start writing down the words you say at critical junctures in your trading. You’ll begin to understand where your thinking is helpful and harmful, and you’ll be able to change the direction of your thoughts by shifting your words. There’s an article on my website discussing the critical importance of questions. Check it out. What if you could learn to direct your words and thoughts in such a way that you truly support your success in trading?

Courage and Trading

  
  Education
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According to Plutarch, “Courage stands halfway between cowardice and rashness…” Clearly, we don’t want to be reckless; and clearly, we don’t want to be hesitant and timid. What we need is a balance. As we go about our trading moderating our greed and our fear to a combination of healthy desire and clear minded caution, we use courage to go forward.

Courage doesn’t mean closing your eyes, holding your nose, and jumping into the deep end. It does mean moving forward with clean and clear perception as well as steadfastness of purpose.

You don’t need courage if you’re totally confident and unafraid. Courage, according to John Wayne, is being scared to death and saddling up anyway. Because people tend to fear the unknown, and the unknown is all that is certain about any given trade, we need to employ courage. Since trading is always new, since anything can happen and it often does, since the wildness lies in wait, we need to overcome uncertainty and fear so that we can appropriately enter, exit, and remain in trades.

When asked what he meant by “guts”, Ernest Hemingway told Dorothy Parker in an interview “grace under pressure”. Trading is all about grace and gracefulness under pressure.

The good news is that courage is like any muscle. It grows and becomes stronger the more you use it. Often as I trade I’m unaware of utilizing courage. I know I’m extremely alert. I may even be excited. I’m not aware of any fear until something starts to go wrong. However, that alertness and excitement is a product of adrenalin running. Excitement or fear comes from the interpretation you give to the adrenalin high. The more you act as if you’re unafraid, the less afraid you become. It all gets easier. Act the part and become the part. Make it your goal to trade with increasing grace under pressure.

The difference between excitement and fear depends of what you are imagining.

Are you imagining loss or are you imagining profit? Of course, you always have to keep the alternative in mind as trading is all about balancing the alternatives, profit with loss. But you don’t have to put loss into the foreground of your mind, because you never would put on a trade unless profit was the probable outcome. Direct your imagination towards profit, and suspend all thoughts of loss–once you’ve put your stops in.

“Don’t cry before you’re hurt.” says a proverb. I would add, don’t mourn a loss before you experience it. Don’t even mourn it after you take it, get on with the next trade, and the next, and the next. Anticipate profit. That’s what you’re there to experience. Ah yes, and as another proverb states: “Fortune favors the brave.”

Courage and Trading

  
  Education
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According to Plutarch, “Courage stands halfway between cowardice and rashness…” Clearly, we don’t want to be reckless; and clearly, we don’t want to be hesitant and timid. What we need is a balance. As we go about our trading moderating our greed and our fear to a combination of healthy desire and clear minded caution, we use courage to go forward.

Courage doesn’t mean closing your eyes, holding your nose, and jumping into the deep end. It does mean moving forward with clean and clear perception as well as steadfastness of purpose.

You don’t need courage if you’re totally confident and unafraid. Courage, according to John Wayne, is being scared to death and saddling up anyway. Because people tend to fear the unknown, and the unknown is all that is certain about any given trade, we need to employ courage. Since trading is always new, since anything can happen and it often does, since the wildness lies in wait, we need to overcome uncertainty and fear so that we can appropriately enter, exit, and remain in trades. (more…)

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