Patience is a virtue, and no place does this truism hold more water than the stock market. When a trader allows doubt, a facet of fear, to inform his trading decision, he sets himself up for failure. The market does not care about the wants of an individual trader, whereas when making a turn across oncoming traffic, a mistake may result only in an oncoming driver slamming on his or her brakes in order to avoid an accident. The market will not extend such a courtesy. It will run over anyone and anything between it and where it is going without as much as an afterthought. It is the responsibility, not of the market to go where the trader wants it to go, but for the trader to determine the most likely course of the market and plan accordingly. Patience, achieved by a trader monitoring his internal dialogue, makes it possible.
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rssTrading Commandments
| Respect the price action but never defer to it. Our eyes are valuable tools when trading but if we deferred to the flickering ticks, stocks would be “better” up and “worse” down and that’s a losing proposition. Discipline trumps conviction. No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always attempt to define your risk and never believe that you’re smarter than the market. Opportunities are made up easier than losses. It’s not necessary to play every day; it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability. Emotion is the enemy when trading. Emotional decisions have a way of coming back to haunt you. If you’re personally attached to a position, your decision making process will be flawed. Take a deep breath before risking your hard earned coin. Zig when others Zag. Sell hope, buy despair and take the other side of emotional disconnects (in the context of controlled risk). If you can’t find the sheep in the herd, chances are that you’re it. Adapt your style to the market. Different investment approaches are warranted at different junctures and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you. Maximize your reward relative to your risk. If you’re patient and pick your spots, edges will emerge that provide an advantageous risk/reward profile. Proactive patience is a virtue. Perception is reality in the marketplace. Identifying the prevalent psychology is a necessary process when trading. It’s not “what is,” it’s what’s perceived to be that dictates supply and demand. When unsure, trade “in between.” Your risk profile should always be an extension of your thought process. If you’re unsure, trade smaller until you identify your comfort zone. Don’t let your bad trades turn into investments. Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off—win, lose or draw. |
Overtrading: A Common Mistake
Over trading is one of the biggest causes why traders never make it in the financial markets. With a click of a button, a trader can place a trade anytime he wants. It takes tremendous discipline to hold yourself back from over trading. There are many reasons why one may choose to over trade.
1. Traders without a plan
Traders without a plan are my favorite type of traders because they will always lose. Without a plan, how would one know when to take a trade and when not to? Having a trading plan is a necessity. I can not trade if I do not have a plan for the day. I feel lost without one.
2. Revenge trading
Many new traders become tilted after a loss or a string of losses. This causes them to revenge trade just to break even. This often leads to reckless trading forcing a trade when opportunity is low.
3. Chasing the markets
Alot of new traders feel more pain when they have missed a move than an actual loss. This is why new traders love to chase the markets. If price has moved away from your projected entry point, let it go. There are plenty of more opportunities. Chasing is one of the worst habits a trader can have. Not only does it offer you low rewards, it also gives you a horrible entry and alters your stop loss placement. Always think about the risk before the profits.
When you have a plan to follow, it is easy to filter out bad trades from good one. This keeps you discipline and selective in your trades. I personally do not like trading more than 5 round trips a day. Patience is a virtue. There are always good high probability trading opportunities everyday. Just sit tight and don’t jump the gun.
One way to control a loss is by reducing your size. The problem with gamblers is that they will often double up their stake so they can get even quicker. This usually leads to a greater loss and devastation. Having the strength to grind your way back from a loss is important in trading. Whenever I am having a losing streak, I will trade small and gradually recover. This also gives me the confidence I need after a string of losses.
Understanding Yourself
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Ten Trading Commandments
Respect the price action but never defer to it.
The action (or “eyes”) is a valuable tool when trading but if you defer to the flickering ticks, stocks would be “better” up and “worse” down—and that’s a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.
Discipline trumps conviction.
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you’re smarter than the market.
Opportunities are made up easier than losses.
It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
Emotion is the enemy when trading.
Emotional decisions always have a way of coming back to haunt you. If you’re personally attached to a position, your decision making process will be flawed. It’s that simple. (more…)