Trying to win in the markets without a trading plan is like trying to build a house without blue prints – costly (and avoidable) mistakes are virtually inevitable. A trading plan simply requires a personal trading method with specific money management and trade entry rules.
Discipline was probably most frequent word used by the exceptional trades that I interviewed.
There are two reasons why discipline is critical.
- Its a prerequisite for maintaining effective risk control.
- You need discipline to apply your methods without second guessing and choosing which trade to take.
A final word, remember that you are never immune to bad trading habits – the best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return !
Let’s take a break and look at some trading psychology tips. Today our ideas are coming from one of my favorite books that’s not really trading-oriented. We’re going to be looking at a few highlights from a book called “The Power Of Focus”, by Jack Canfield, Mark Hansen, and Les Hewitt. While there’s no way to do the book justice in our limited space here, hopefully you’ll take away some of the more important pieces of the book. And best of all, you’ll be able to apply them immediately.
Your habits will determine your future. This is not news to any of us, but what I found interesting was something of an aside in the book. The book contends that the results of bad habits don’t show up until well after the habit has been learned. That’s unfortunate too, as we all know that it’s incredibly difficult to unlearn something. The implication is that that you’ll be engaging in a destructive behavior, but you may not know it until it’s far too late to actually do anything about it. In fact, up to 90% of your everyday behavior is based on habits. Have you made it a habit to spend an hour a day preparing and doing trade research? Have you committed to waking up an hour earlier to plan your trading or work day? Or do you hit the snooze button a few times, and miss out on reviewing the news and charts of your positions? Habits are the key to success.
Your goals must have a number. And this doesn’t just mean the total returns on your trades, as an overall goal is still too ambiguous to actually use in making daily plans. You need to know how many trades per day, week, or month it will take to achieve your goal. Of course, you’ll also need to know what type of return you need to average on each trade to reach that goal. As the book states so accurately, “a goal without a number is just a slogan.”
Take decisive action. They say 80% of success is showing up, and that’s probably a pretty good rule of thumb. So how does one “show up” to be a trader? By taking trading action! And if you’re not taking the action you know you should be taking, you absolutely must understand and admit that you’re procrastinating. Stings, doesn’t it? But recognizing the truth is the first step to attacking any problem. The book explains six reasons for procrastination; think about which ones apply to you.
1) You’re bored.
2) You’re overwhelmed.
3) Your confidence has slipped.
4) You have low self-esteem.
5) You don’t enjoy what you do.
6) You’re easily distracted. (more…)
Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
There are three motivations behind taking a trade: monetary reward, educational reward, and/or psychological reward. The first pays the bills, the second will pay the bills, and the last will prevent you from paying the bills.
Whenever I feel the pull of psychological reward, I have the voice saying “do you want to be a trader?” Letting go of the psychological need to take a trade or be right, is hard. Our brain does not know what money is. It listens in terms of chemical releases. Letting go of psychological reward is not easy. It is the most instantaneous form of reward.
The best way I know to give psychological power to money is to make a habit of seeing money as opportunity. Opportunity for financial freedom and opportunity to make another trade. The brain understands opportunity. This needs to be in balance as well.
If you are feeling the psychological pull, take a few seconds and answer the following.
Do I want to be a trader?
Did my last trade affect the thought process in an irrational way for this trade? (Need to be right, need to make my money back, I am invincible, etc.)
Can I get a better price or is this my best opportunity?
Am I seeing the whole picture?
As always, am I willing to accept the consequences of my action or inaction?
Always take your profit too soon.
Sell too soon. Don’t hope for winning streaks to go on and on. Don’t stretch your luck. Expect winning streaks to be short. When you reach a previously decided-upon ending position, cash out and walk away. Do this even when everything looks rosy, when everyone else is saying the boom will keep roaring along.
The ONLY reason for not doing it would be that some new situation has arisen, and this situation makes you all but certain that you can go on winning for a while.
Except in such usual circumstances, get in the habit of selling too soon. And when you’ve sold, don’t torment yourself if the winning continues without you.
When the ship starts to sink, don’t pray. Jump.
Learning to take losses is an essential speculative technique. MOST never learn it. Take losses at once and move on. Take small losses to protect yourself from the big ones.
Beware the 3 obstacles to jumping ship:
– fear of regret ( that the loser will turn out to be a winner when you’ve bailed-out )
– Unwillingness to abandon part of an investment ( become willing to abandon )
– Difficulty of admitting you made a mistake.
1. You will be tested mentally and emotionally this is not for the weak minded.
2. Master Traders are detached emotionally from profit or loss.
3. Boredom is the enemy of the master opportunist.
4. Haste is the enemy of great entry points.
5. Doubt is often followed by a lost opportunity.
6. The Trend will give you direction on your path.
7. Having an exit strategy prevents unnecessary pain.
8. The laws of probability give strength to your fingers.
9. Going against momentum brings forth the fools reward.
10. Better the bad trade that is unrewarding.
11. Habit is built on the principles of probability.
12. Know your exit point in the worst case scenario first.
13. The master trader is an escape artist.
14. When one knows the present they master the futures.
15. Set realistic goals and let the good times role.
16. A loss can be turned into a win when one is swift.
17. A master in day trading trades in an egoless state.
18. Times of great probability are like diamonds falling from the sky.
The folks at EWI (Elliott Wave International) released a provoking new article today entitled:
“Blaming Market Manipulation for Losses is a Huge Obstacle to Success.”
The article encourages traders to take responsibility for losses instead of finding scape-goats to blame.
Losses may have just been the result of a bad outcome from a high-probability trade… or might have been the result of a bad trading habit like doubling down on losers or chasing a fast price move.
Mr. Prechter makes the point that “Losses are part of the game” and should be used as learning experiences.
You won’t learn if your loss was a result of random probability or a bad trading behavior if you do not analyze the loss, and instead sweep it under the rug as a painful memory.
I particularly liked the quote:
“You don’t have to be perfect to win in the markets, either; you “merely” have to be better than almost everybody else, and that’s hard enough.”
The article is actually the 4th Point in an article published years ago (not during the current market melt-up!) by Robert Prechter on what it takes to be a successful trader.
It’s brief, but thought-provoking!