I have been a trader for about 14 years and in that time period I have seen many strategies fail because traders only have to have a couple losing trades in a row before they throw out the whole system and go back to trading on impulse. Once a trader gets into this situation, they tend to head in a downward spiral and quick. Our emotions tend to get people in at dead highs and then our emotions tend to get us out at the dead lows as we continually buy tops and sell bottoms out of impulse, panic and fear. It is this cycle that tends to happen over and over again. Additionally, this cycle WILL NEVER STOP.
The stock market (and all financial markets for that matter) naturally take advantage of and prey upon our human nature, especially when it comes to greed, hope and fear. The key is to remember that the biggest movements in the markets occur not when traders “feel like buying.” They occur because groups of traders (and machines programmed by humans) are all getting smoked at the same time and are forced out of a position. In reality, traders are not trading the stocks, futures or options. They are trading other traders. The very fine line that separates the profitable traders from the herd is that those that learn to be aware of the psychology and emotions behind the person taking the trade on the other side. The herd (or the average market participant) only understands their own side of the trade. The stronger minded traders (code for profitable trader) understands what’s happening on both sides and understands how to take advantage of human weakness, and therefore they are able to grind most others into the ground. In short, winners take money from losers. I know this may sound harsh but in a business or up, down or sideways, sometimes it just that basic.
Good skiers rarely worry about a route down a mountain. They just go, confident that they’ll react to changes in the trail as they come upon them. It’s the same thing in trading: Traders have to have the confidence in their technique. That’s the beauty of mustering the right mindset before a trader starts the day. This enables you to feel like a good skier, nice and relaxed for the next unexpected turn.
*DISCLOSURES: Short LULU and REGN
