part 2 of Jack the Trader....
Good trades don't always work out. A good trade is one that
has the probabilities in its favor, but that doesn't mean that it will always work out. People who have a background in game theory understand this well. The statistics are only
meaningful when looking at a string of numbers. For example, in professional football, not every play is going to gain yardage. What percentage of games do you need to win in order to make the playoffs? It's a number much
smaller than most of us are willing to accept in our own
win/loss ratios!
Here is an interesting question: should you look at a trade
logically or psychologically? In other words, should every trade stand on its own merits? Theoretically, yes, but in real life it doesn't always work that way. A trader is likely to manage a position differently depending on whether
the previous trade was a winner or a loser.
How does one know when to take profits on a good trade? You
must ask yourself first how greedy do you want to be, or, how much money do you want to make? And also, does your
pattern have a "perceived profit" or objective level? Why is
it that we hear successful winning traders complain far more about getting out of good trades too soon than not getting out of bad trades soon enough? There's an old expression: "Profits are like eels, they slip away."
Successful traders are very defensive of their capital. They
are far more likely to exit a trade that doesn't work right away than to give it the benefit of the doubt. The best trades work right away! OK. Realistically, every trader has made a stubborn, big losing trade. What do you do if you're
really caught in a pickle? The first thing is to offer a
"prayer to the Gods". This means,immediately get rid of half your position. Cut down the size. Right off the bat you are taking action instead of freezing up. You are reducing your risk,and you have shifted the psychological
balance to a win-win situation. If the market turns around,
you still have part of your position on. If it continues against you, your loss will be more manageable. Usually, you will find that you wished you exited the whole position on the first order, but not everyone is able to do this.
At an annual Market Technician's conference, a famous trader
was speaking and someone in the audience asked him what he did when he had terrible losing trades. He replied that when his stomach began to hurt, he'd "puke them at the lows along with everyone else." The point is,everyone makes mistakes but sooner or later you're going to have to exit that nasty losing position. "Feel good" trades help get one back in the game. It's nice to start the day with a winning scalp.It tends to give you more breathing room on the next trade.The day's psychology is shifted in your favor right away. This is also why it's so important to get rid of losing trades the day before. so you don't have to deal with them first thing in the morning. This is usually when the choice opportunity is and you want to be ready to take
advantage of it.
A small profitable scalp is the easiest trade to make. The
whole secret is to get in and get out of the market as quickly as possible. Enter in the direction of the market's last thrust or impulse. The shorter the period of time you are is the marketplace,the easier it is to make a winning
trade. Of course, this strategy of making a small scalp is
not substantial enough to make a living, but remember the object is to start the day out on the right foot.
If you are following a methodology consistently (key word),
and making money, how do you make more money? You must build up the number of units traded without increasing the
leverage. In other words, don't try going for the bigger
trade, instead, trade more contracts. It just takes awhile to build up your account or the amount of capital under management. Proper leverage can be the key to your success and longevity in this business. Most traders who run
into trouble have too big a trade on. Size influences your
objectivity. Your main object should be to stay in the game.
Most people react differently when they're under pressure.
They tend to be more emotional or reactive. They tense up and judgement is often impaired.Many talented athletes can't cut it because they choke when the pressure's on. You could be a brilliant analyst but a lousy trader. Consistency is far more important than brilliance. Just
strive for consistency in what you do and let go of the performance expectations.
Master the Game
The last key to achieving mental mastery over the game is believing that you can actually do it. Everyone is capable of being a successful trader if they truly believe they can be. You must believe in the power of belief. If you're a recluse skeptic or self-doubter, begin by pretending to
believe you can make it. Keep telling yourself that you'll
make it even if it takes you five years. If a person's will is strong enough, they will always find away.
If you admit to yourself that you truly don't have the willto win at this game, don't try to trade. It
is too easy to lose too much money. Many people think that
they'll enjoy trading when they really don't. It's boring at times, lonely during the day,mentally trying, with little structure or security. The markets are not a logical or fair playing ground. But there are numerous inefficiencies and patterns ready to be exploited, and there
always will be. |
