Understand the Psychological Keys of Trading
There are many people who teach the psychology of trading. There have been
many books written and effort spent on seminars trying to teach the discipline
needed for trading. I don’t think trading is that complex. I have developed a few
simple psychological rules for myself, and once you accept them, they should
greatly enhance your ability to trade effectively.
ACCEPT LOSSES AS A COST OF DOING BUSINESS
Most successful traders will tell you that the most difficult thing about trading is
accepting the losing trade. We all have the desire to be to be right, to be correct all of the time. For novice traders, the losing trade means that something is not
working and that you have somehow made a mistake. For experienced traders,
losses are just a cost of doing business.
Some of the best traders in the world lose money on more than half of their
trades. If you look at the performance results of the best traders and money
managers, you will see that they all have a large percentage of losing trades. If you trade, I guarantee you that you will have losing trades. Learn to love losing trades.
They should be your friend because you will be spending a lot of time with them.
USE HISTORICAL STATISTICS
I don’t think anyone has ever traded without first looking at historical statistics.
Even some traders who deny they are strategy traders have used historical data.
And before EasyLanguage and TradeStation were available, most good traders
developed a strategy’s history by hand. I can remember countless hours pouring
over charts spread out on the kitchen table, writing down trades by hand. Before I
would trade it, I absolutely insisted on knowing what the strategy’s personality was
and how much money it would have made.
Using historical statistics gives you great peace mind, particularly in learning to
love losing trades. Knowing the history of a trading strategy can give you
tremendous psychological comfort during those tough periods of losing trades
and drawdown. Historical statistics tell you how much money the strategy has lost
in the past, how many losing trades it has had in a row, and the largest losing trade the strategy has experienced. This is very important information if you are learning to accept losing trades. Comparing historical data with the current string of losses and drawdown can give you much comfort that what you are experiencing now is not unusual and has happened before. Maybe not in exactly the same manner, but
it has happened before.
LET THE MARKET AND STRATEGY DETERMINE THE PROFITS
Don’t have an opinion, don’t try to predict the market, and don’t try to second-
guess your strategy. It’s human nature to have an opinion about things, but this
opinion can become a stumbling block if we let it affect our trading. One of the
alluring aspects to having an opinion on the market is the exhilaration of being
right. Even though we know that the chances of being right are slim, we
nonetheless want to prove our intellectual prowess by being right.
Your trading strategy is ultimately a little business. You have developed and tested
the product and are now operating the business in the real world. Let the strategy
be the strategy. Let it make the money you know that it can. And know that if the
market doesn’t move in the manner that will allow the strategy to make money, it
won’t make money. Ultimately, the market determines the profit through its
movement. If it doesn’t make that move, there will not be profits.
Put the responsibility of making money on the strategy and the market. When they
work together, you will have a profitable business.